Moody’s Investors Service has downgraded Macau’s government debt issuer rating to Aa3 from Aa2 and assigned it a negative outlook, the credit ratings agency said on Wednesday.
“The rating downgrade reflects Moody’s view that the sharp weakening in the economy, with growth remaining highly volatile, coupled with the limited policy response to the fall in gaming revenues, leave Macau’s credit profile weaker than those of Aa2 peers,” the firm stated in a release.
The downgrade has no immediate impact on the Macau government since it has no debt. The Aa3 rating is considered within “investment level”.
In a statement regarding the rating downgrade by Moody’s, the Monetary Authority of Macao said that the city’s “economic and financial conditions are fundamentally sound and [Macau] is able to deal with fluctuations.”
The body highlighted the fiscal surplus of MOP15.5 billion (US$1.9 billion) recorded in the first four months of 2016, on top of an annual fiscal surplus of MOP29.3 billion in 2015.
“At the end of the first quarter of 2016, fiscal reserve assets were preliminarily estimated at MOP436.0 billion, which was equivalent to 59 months of 2016 budgeted government expenditure,” the monetary authority added.
Monthly casino gross gaming revenue (GGR) in Macau has fallen year-on-year for 23 months in a row. In May, the GGR decline trend is likely to mark a two-year milestone, say several investment analysts, although they also see some stabilisation in GGR when the numbers are judged month-on-month.
“Macau’s credit profile remains very strong in comparison with the majority of Moody’s rated sovereigns,” Moody’s noted in its Wednesday release. However, the credit ratings agency noted that the city’s growth “is highly dependent on the gaming sector”, which accounts for 58.3 percent of economic output, about three-quarters of its service exports and three-quarters of total fiscal revenues.
The ongoing slump in GGR has had a significant impact on the city’s gross domestic product. In 2015, the economy shrank 20.3 percent year-on-year, extending a 0.9 percent contraction seen in 2014.
Macau’s accumulated GGR for the full year of 2015 fell 34.3 percent compared to 2014, according to data released by the city’s regulator, the Gaming Inspection and Coordination Bureau. In 2014, GGR had fallen 2.6 percent.
“Our expectation of a decrease in gaming revenues this year and next suggests that Macau’s economic, fiscal and external metrics will likely weaken considerably from prior robust trends,” Moody’s stated.
The credit ratings agency expects Macau’s GDP to continue contracting in 2016 and 2017.
Moody’s also commented on the policies by the Macau government to promote economic diversification.
It stated: “Its strategies centre primarily around broadening Macau’s gaming and tourism market, leaving growth volatile and susceptible to shifts in external demand.”
A consultation paper on a master plan for the development of Macau’s tourism sector – presented on Monday by the Macao Government Tourism Office – forecast that annual non-gaming tourism revenue could double over the next 10 years, from US$6.4 billion in 2015 to between US$12 billion and US$14 billion in 2025.
The document did not say how much of that increase would come from non-gaming products offered by the city’s casino resorts.
According to the Macau government’s “mid-term” review report of the local casino industry – disclosed earlier this month – non-gaming business generated revenues of MOP23.2 billion (US$3.0 billion) for Macau’s casino operators in 2014.
Under the Macau government’s proposed Five-Year Development Plan – a recently-announced package of social and economic policies covering the period 2016 to 2020 – the authorities want to see non-gaming revenue at the city’s casino resorts rise as a proportion of all revenue, to help the city’s economic diversification.
By 2020 the Macau government wishes to see such non-gaming revenue account on average for at least 9 percent of all revenue generated by casino operators, compared to an estimated 6.6 percent in 2014.
Some industry insiders say diversification of the Macau tourism market is hard to achieve because Chinese customers at the city’s large casino resorts mainly want to spend their money on gambling.
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”We expect Okada [Manila] to add US$1.2 billion of GGR by 2019 to the overall market, capturing 32 percent market share”
Alex Poon and Praveen Choudhary
Analysts at Morgan Stanley