Fitch Ratings Inc says a recently-reported “proposal to introduce online gaming on Hainan Island” does not “pose any imminent threat” to Macau’s sovereign rating profile.
Macau would “remain the only Chinese territory able to operate physical casinos,” noted the agency in a report published on Tuesday.
It nonetheless stated in an updated assessment of the territory’s sovereign debt rating: “A challenge to Macau’s economic model could potentially emerge over the longer term should China revise existing criminal laws that prohibit most forms of gambling in the mainland, or if other emerging gaming destinations in Asia were to gain significant favour among Chinese tourists.”
“Even in such a scenario, Fitch would expect this to occur gradually, which would provide the authorities time to respond with policy measures such as expenditure cuts or budget amendments,” the report added.
Fitch forecasts Macau’s real gross domestic product to expand by 5 percent in 2018, allowing for a “moderation in gaming revenue growth to around 10 percent, and a continuation of ongoing infrastructure initiatives aimed at enhancing the territory’s connectivity and attractiveness as a tourist destination”.
The ratings house said on February 1 it expected in 2018 that Macau’s market-wide year-on-year growth rate for casino gross gaming revenue would be 11 percent, with the mass segment contributing almost half the tally.
In its latest bulletin on the wider Macau outlook, the ratings body said that the issue of whether there would be refreshment of gaming rights for the city’s current six operators – when their current concessions expire in either 2020 or 2022 – did not “pose a significant downside risk to the territory’s near-term economic stability”.
Fitch wrote: “The existing concessionaires have already exceeded the authorities’ targets to boost the proportion of non-gaming revenues across the sector (having reached 10.7 percent) and dedicate more floor space within resorts to non-gaming entertainment.”
The agency added the it thought the gaming rights issue would be linked to support from the incumbents regarding the Macau government’s ongoing efforts at diversification of the local economy beyond high-stakes gambling, but added “specific guiding principles have yet to be announced” regarding the refreshment question.
Fitch said on Tuesday that it in its latest assessment it had upgraded Macau’s sovereign long-term debt status to “AA” with a “stable” outlook, from “AA-“ previously.
“The Macau authorities have demonstrated a commitment to fiscal prudence through a period of gaming windfalls and a heavy revenue shock,” noted the agency in a Tuesday announcement. The latter reference was understood to concern the sustained contraction of gross gaming revenue that occurred in the Macau market in 2015 and 2016, which a number of analysts attributed to China’s anti-corruption campaign.
In mid-February last year, the International Monetary Fund had noted in a report on Macau’s economic outlook, that due to high taxes on the gaming sector – an effective rate of 39 percent on wagers – and “discipline on public spending,” Macau was unusual among its sovereign debt-status peers for having no public debt.
Fitch noted in its Tuesday statement: “The territory’s fiscal and external balance sheets have strengthened to levels that more than offset the significant risks associated with its narrow economic base and concentration on mainland Chinese gaming tourism.”
The agency added: “Macau is the only Fitch-rated sovereign globally without any outstanding government borrowings, whereas gross general government debt for the ‘AA’ median grew to an estimated 42 percent of GDP in 2017.”
Fitch estimates Macau’s fiscal reserves were approximately 137 percent of GDP at end-2017, “equivalent to 5.6 times the planned 2018 budgetary expenditure”.
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”Any reduction in [Macau gaming] tax would be positive for future profits and cash flows, all else equal”
DS Kim, Amanda Cheng and Livy Lyu
Analysts at brokerage JP Morgan Securities (Asia Pacific)