Ratings agency Moody’s Investors Service said in a Friday note it had placed the Macau government’s “Aa2” credit rating on review for downgrade.
The ratings house said it would downgrade Macau’s rating if its review “were to conclude that the government’s fiscal and external strengths will deteriorate relative to similarly rated peers”. It said the context for its assessment was a downturn in the city’s economic performance, and in particular to an ongoing revenue decline in Macau’s casino industry.
Casino gross gaming revenue (GGR) in Macau was at near standstill year-on-year in February, down by just 0.1 percent from the same month a year earlier. The city’s casino revenue has been decreasing for the past 21 months measured in year-on-year terms.
“Macau is highly dependent on the gaming sector, which accounts for 59.1 percent of the Special Administrative Region’s economic output at current prices, more than four-fifths of its service exports, and three-quarters of total fiscal revenues,” stated Moody’s.
“Our expectation of a prolonged decline in gaming revenues suggests that Macau’s growth, fiscal and external metrics will likely deteriorate to levels below those consistent with its Aa2 rating,” the institution added.
The review by Moody’s will assess the extent of the impact of the decline in gaming revenues on Macau’s broader economic strength, on its balance of payments, and the government’s financial position, the agency said on Friday. The review will also assess the implications of Moody’s recent outlook change on mainland China’s rating to negative from stable. This was in view of Macau’s strong financial, political and institutional links with China, said the agency.
The ratings house said it expects to complete the review within three months.
Another financial institution, Fitch Ratings Inc, last week said the ongoing slump in casino GGR is likely to push down Macau’s gross domestic product (GDP) by 6.5 percent in 2016. Fitch also affirmed Macau’s long-term foreign- and local-currency-denominated issuer default ratings at AA-minus with a ‘stable’ outlook.
Macau’s GDP declined by 20.3 percent year-on-year in real terms in 2015, according to official data. The drop in GDP accelerated from the 0.9-percent year-on-year slump seen in 2014, as casino GGR in the city continued to slide.
“The decline in gaming revenues has been due to a fall in the number of tourists from the mainland, for whom Macau’s casinos are the primary attraction. This development owes, in turn, to the ongoing anti-corruption drive in China, which will likely result in a prolonged downturn in the gaming industry,” said Moody’s.
The Macau government has been trying to diversify the economy away from gaming, but Moody’s said it expects “that growth will continue to contract over 2016 and 2017, although the pace of decline may ease”.
The ratings house added that the shock to the mainstay of Macau’s economy has “resulted in a considerable erosion” of the government’s fiscal and current account surpluses.
“In 2015, the current account surplus shrank to 20.8 percent of GDP from 38 percent in 2014; while the government’s central account fiscal surplus fell to 7.9 percent of GDP from 21.4 percent in 2014, based on the integrated statement,” said Moody’s.
Nonetheless Moody’s said Macau’s fiscal strength is strongly supported by the absence of public debt and its sizeable fiscal and foreign reserves.
In a statement on Friday, the Monetary Authority of Macao said the existing ratings on Macau by Fitch and Moody’s “help stabilise financing costs of the SAR and its institutions,” and were an international recognition of “Macau’s fiscal and financial stability”.
The monetary authority added: “At the moment, Macau’s fiscal and financial conditions are sound … The fiscal surplus stood at MOP29.3 billion [US$3.67 billion] in 2015. The government has assets of over MOP400 billion in the fiscal reserve and is debt-free.”
Moody’s said its review would allow the ratings body to assess “how much positive weight should be placed on Macau’s strong fiscal buffers,” adding that the government fiscal reserves “could dwindle over the medium-term if they were to be used to fund possible future general government deficits beyond 2017”.
