Ratings agency Fitch Ratings has affirmed Macau’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at “AA” with a Stable Outlook, citing the SAR’s “exceptionally strong” finances and commitment to fiscal prudence.
In its latest evaluation released on Wednesday, Fitch pointed to a projected budget surplus of 9.5% of GDP in 2018, combined with expenditures remaining well under budget, as continuing to boost fiscal revenues.
It also described Macau Chief Executive Fernando Chui Sai On’s recent 2019 Policy Address in which he declared a central budget surplus target of MOP$18 billion, or 4% of GDP, as overly conservative. Fitch forecasts a 2019 budget surplus of 9.4% of GDP in 2019, driven by projected gaming revenue growth of around 5%.
“The gaming sector has performed above Fitch’s expectations this year, with gross revenue from Games of Fortune up by 13.7% year-on-year during the 11 months ending November 2018,” the ratings agency stated.
“Tourism inflows also continue to exhibit robust growth, supported by various initiatives to streamline applications for mainland travel permits, as well as enhanced cross-border connectivity, including the newly opened Hong Kong-Zhuhai-Macau Bridge.
“Mass-market gaming has grown rapidly this year, in line with the authorities’ desire to rebalance away from the more volatile VIP segment, but dependence on VIP gamers still remains high at about 55% of territory-wide gaming revenue.”
Notably, Fitch said it would be surprised to see the Macau government upset the status quo when it officially launches the re-tendering process for Macau gaming licenses in the near future. The gaming concessions of both SJM and MGM expire in March 2020 with those of Galaxy, Sands, Wynn and Melco Resorts expiring in 2022.
Fitch described the re-tendering as a risk but said it believes it is “unlikely to negatively impact Macau’s sovereign creditworthiness.”
“The government has indicated it has started relevant preparations, but has yet to disclose any information to the public,” it said. “Fitch does not believe the authorities would seek to disrupt the normal business operations of gaming operators, given the potential spill-over effects it could have on fiscal revenues, employment and tourism more broadly.
“However, the agency does expect renewals to be linked to further commitments by gaming operators to support the diversification of the economy into non-gaming entertainment. Meanwhile, resort operators have continued to make significant capital investments across the Cotai strip, which suggests that they do not expect negotiations to adversely impact their medium-term business prospects.”
Fitch affirmed all of Macau’s key ratings drivers, including Long-Term Local-Currency IDR at “AA” with Outlook Stable, Short-Term Foreign-Currency IDR at “F1+”, Short-Term Local-Currency IDR at “F1+” and Country Ceiling at “AAA”.
However, it warned that the ratings are constrained by Macau’s high GDP volatility, concentration on the gaming sector and reliance tourism from mainland China, and its susceptibility to changes in China’s broader policy environment.
