Fitch Ratings has revised its rating outlook for Macau from ‘Stable’ to ‘Negative’ due to the territory’s increased “mainland Chinese exposure.”
Fitch writes: “The agency's 'AA' rating on Macao is currently two notches above that of mainland China (A+/Stable), and rests on the assumption that the territory's governance, rule of law, economic policy framework, and business and regulatory environments remain distinct from that of the mainland. These assumptions are now evolving as China's Special Administrative Regions (SARs) become more closely integrated into the national governance system, which has been accelerated by events in Hong Kong, as well as via policy initiatives such as the Greater Bay Area, which seek to enhance long-term regional growth opportunities by more closely integrating the economies of southern China.”
Turning to the gaming industry specifically, they observed that they do “not believe it is likely that the Macao operations of US casino operators will be enveloped in ongoing US-China trade tensions, given the potential ramifications this could have on local employment and the territory's social stability. However, Macao's growth outlook could be indirectly affected by further escalations in US-China trade tensions.”
“Macao's narrow economic base, which relies overwhelmingly on gaming tourism from mainland China, constitutes one of its principal rating constraints. The gaming industry represents 51 percent of aggregate activity and 22 percent of the employed population, despite efforts to diversify into other sectors. This elevated concentration to a single industry exposes the economy to shocks, and has contributed to Macao's historically high level of GDP volatility,” they added.
In conclusion, “Fitch considers the mainland China exposure (MCE) of Macao banks as the single biggest financial sector risk.”
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