VIP Gambling—Recession Hedge or Achilles’ Heel?

Macau’s dependence on credit-loving high rollers could be a problem when global credit markets are squeezed

The Goldman Sachs research paper says VIP players’ spending is generally less susceptible to sudden fall back in a recession compared to that of mass-market players. But it suggests Macau’s dependence on high rollers could actually be its weak point in the present economic crisis, which is precisely focused on liquidity and the limited availability of credit.

“Gaming is a consumer leisure expense, and hence exhibits strong correlation with GDP growth. Macau’s gaming market, however, is different due to the relatively greater contribution of VIP players, who tend to be less sensitive to macro economic conditions,” says the report.

Crunch time

“Nonetheless, we believe the severity of the global credit crunch would affect the rolling market in two ways: first, just as the availability of credit was an important driver of volume growth in 1H2008, the current tight credit environment would make it difficult for junkets to raise capital; and second, VIP players may take longer to repay their debt, which would reduce the multiplier effect of junkets’ working capital on the rolling volumes,” says the analysts’ report.

“We estimate 17% gaming revenue decline in 2009E (similar to 1998 which saw -18% decline).”

Goldman Sachs points out that even though revenue growth in Macau correlates less strongly with feeder market GDP growth than is the case in United States’ gaming jurisdictions, the Macau gross has shown volatility in previous cycles, with spikes during bull markets and troughs during bear markets.

“In the last economic downturn, Macau’s gaming revenue fell -18%/-11% in 1998/99 but grew +29% in 2003; VIP gaming revenue fell -25%/-7%, but rose +36%, respectively,” says the report.