The recent devaluation of China’s currency – the renminbi – will “reduce the attractiveness” of Macau among tourists coming from mainland China, says the Monetary Authority of Macao.
Mainland China is the main feeder market for Macau’s casino industry. Visitors coming from mainland China accounted for two thirds of the 14.76 million tourists the city welcomed during the first half of this year, according to official data..
“Tourism is the dominant sector of the economy and the mainland is the top visitor-generating area for [Macau], accounting for over half of the [city]’s visitor arrivals,” the monetary authority said in a statement issued on Thursday. “Hence, the weakening of the renminbi might reduce the attractiveness of the [city] as a tourism destination for mainland visitors. Tourism and retail businesses would be adversely affected in the short term.”
The Monetary Authority of Macao however noted that the current devaluation of the renminbi “is still mild compared to the revaluation in the past few years”.
It added: “[Macau’s] development towards a world tourism and leisure centre through diversifications in industrial structure and visitor sources remains intact.”
In a statement earlier this week, the People’s Bank of China said it had changed the way it calculated the renminbi’s daily midpoint against the U.S. dollar, now taking the midpoint from market-makers’ quotes and the previous day’s closing price.
Following the announcement, the daily reference rate for the yuan against the U.S. dollar dropped by 1.9 percent on Tuesday. It was the biggest one-day drop since 1994.
Although the Macau government reports its casino gross gaming revenue (GGR) in the territory’s currency, the pataca (also known as MOP), most bets at Macau casinos are denominated in Hong Kong dollars, a currency currently pegged to the U.S. dollar. The pataca is indirectly pegged to the U.S. dollar via an association with the Hong Kong dollar, whereby MOP1.03 is approximately equal to HKD1.00.
Bad news for VIP
Daiwa Securities Group Inc said in a note on Wednesday that the recent renminbi devaluation “could have 8 percent to 10 percent downward impact” on mass casino GGR in Macau in 2016.
The high-roller segment could be hit “even harder” by the renminbi devaluation, with a potential 20 percent downward impact on VIP GGR, Daiwa analysts Jamie Soo, Adrian Chan and Jennifer Wu said in a separate note, issued on Thursday. This in turn would have a 9-percent negative impact on the sector’s earnings before interest, taxation, depreciation and amortisation. More junket room closures are also likely, the Daiwa team added.
The analysts noted that the renminbi devaluation would increase the repayment costs for mainland Chinese VIP casino customers regarding HKD-denominated gaming credit. “By our estimates, the recent approximately 4 percent drop in the renminbi has already created a HKD1.2 billion [US$155 million] to HKD1.6 billion-equivalent haircut on gaming debts – a significant sum comparable to around 15 percent of Macau’s monthly VIP GGR,” they said.
The Daiwa team added: “Depending on the repayment terms, we understand that these forex losses will likely be borne by the junkets and/or the players… For the junkets, this pressure will be asymmetrically distributed, skewing to the mid-sized junkets, which have fewer resources and smaller capital bases to sustain this pressure.”
The renminbi devaluation also translates into a “significant hit to VIP gaming appetite” among mainland Chinese high rollers, noted the brokerage. “Not only does the renminbi weakness shrink HKD-denominated gaming budgets, it threatens to eat into the appetite for gaming,” the Daiwa analysts stated.
Japanese brokerage Nomura said that “while a more sustained move toward a weaker renminbi seems quite probable, we are inclined to think the authorities will remain in control of the situation.”
In a note published on Wednesday, Nomura analysts Jens Nordvig and David Fritz added: “This suggests that gradualism will still be a part of policy-making in China, and this may mean that the worst shock effect is behind us, although ultimately the economic data will provide the final verdict on that front.”
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Total spending – excluding gaming expenses – of visitors to Macau in the second quarter of 2017