Fitch Ratings Inc expects Macau’s economy to shrink by 16 percent year-on-year in real terms in 2015, noting it contracted in the second quarter at a faster pace than the ratings agency had expected.
Macau’s gross domestic product (GDP) shrank by 26.4 percent year-on-year in real terms for the three months to June 30. The territory’s GDP fell 6.4 percent quarter-on-quarter. That followed a 12.4 percent quarter-on-quarter fall in the first three months of 2015.
The year-on-year GDP contraction in the second quarter was the largest on record since quarterly numbers were first issued in 2002, according to official data. The decline took Macau’s GDP to about MOP77.5 billion (US$9.7 billion) at constant prices, making it the weakest quarter since the first three months of 2011.
“The contraction underscores the risks to Macau’s economy from its heavy reliance on gaming revenues from Chinese visitors, and its vulnerability to shifts in mainland government policy. Gaming revenues have begun to stabilise in recent months, but the potential remains for substantial shifts to our forecasts – both on the upside and downside – with the evolving economic and policy conditions in China,” Fitch said in a report on Friday.
The ratings agency said it expects Macau’s gaming revenues to drop by about 30 percent in 2015. “The rapid pace of economic contraction thus far has been linked directly to the falling top line at casinos,” it added.
Macau has experienced 15 consecutive months of decline in casino gross gaming revenue (GGR) judged year-on-year. Casino GGR for the first eight months of the year is down 36.5 percent from the equivalent period in 2014.
Fitch said the impact of the casino industry slowdown on the Macau economy “has been limited,” as the impact has mostly been absorbed by casino operators “through narrowing margins”.
“All major casinos have nevertheless remained profitable, and unemployment has stayed low as hotels have sought to retain staff in advance of new casino resort openings in 2016-2017,” noted the ratings house.
Fitch however warns that there are some signs that the domestic economy is beginning to slow. “Household consumption and capital investment growth have fallen, albeit from a high base,” it said.
The Macau government announced last week measures to tighten public spending, aiming to save approximately MOP1.4 billion in the current fiscal year.
Fitch said the retrenchment measures might “help to mitigate the impact on the fiscal account but may squeeze domestic demand”.
“Risks are also growing to income growth and to Macau banks’ loan growth, which could feed through to a further slowdown in the domestic property market,” said the ratings agency.
Macau’s Chief Executive, Fernando Chui Sai On, on Friday said the government would decide later on a second round of austerity measures. Speaking to reporters at a public event, Mr Chui said his administration would “closely monitor the economic environment, especially revenue in September, to determine the necessity of launching further measures to control public expenditure”.
The Chief Executive did not reveal what level of government revenue would trigger another round of cost-cutting measures.
The Macau government’s fiscal surplus was down 59.1 percent year-on-year in the first seven months of 2015 to MOP27.2 billion.
Mr Chui additionally said the government would push ahead with the diversification of the economy, adding that the government would soon launch a campaign to attract more tourists to the city.
In its Friday note, Fitch affirmed Macau’s credit rating at “AA-” with a stable outlook attributable to the territory’s “strong sovereign balance sheet and external position”.
Macau “has no debt liabilities, and retains fiscal reserves and accumulated surpluses in excess of 100 percent of GDP – enough to almost cover six years of expenditures at the 2015 level projected by government,” the ratings agency said.
The note said Macau has “significant policy space” to accommodate a structural shift in the economy and support diversification away from VIP gaming.
Macau’s efforts to generate a significant portion of its earnings from non-gaming activities however face significant challenges, Alex Bumazhny, a director at Fitch, said in recent commentary. Mr Bumazhny said Macau needs to be realistic about the volume and type of non-gaming revenues its casino resorts can produce, adding that it would be hard for the city to adopt a Vegas-style diversity.
While Fitch expects gaming revenues “to continue to stabilise in the second half of 2015,” it warns that the recovery “could be slowed by a number of policy measures”.
“These include a full smoking ban at casinos, restrictions on mainland visitor arrivals, and a continued slowdown in the Chinese economy,” it added.
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