Moody’s downgrades Macau to Aa2, with negative outlook

Tuesday 24th of May 2016

Ratings agency Moody's Investors Service has downgraded Macau's issuer rating to Aa3 from Aa2 on Wednesday, with a negative outlook given a protracted slump in the gambling sector.

“The rating downgrade reflects Moody's view that the sharp weakening in the economy, with growth remaining highly volatile, coupled with the limited policy response to the fall in gaming revenues, leave Macao's credit profile weaker than those of Aa2 peers,” said Moody’s in a press release on Wednesday.

The rating agency said it downgraded Macau’s issuer rating given the SAR’s dependence on the gaming sector, which has undergone an “economic shock” stemming from a decline in tourist arrivals from mainland China.

“Our expectation of a decrease in gaming revenues this year and next suggests that Macao's economic, fiscal and external metrics will likely weaken considerably from prior robust trends. This puts overall sovereign credit risk at levels more consistent with a Aa3 rating.”

Whilst Moody’s noted the government’s push on diversifying the economy, the agency notes the strategies center primarily around broadening the region’s gaming and tourism market, leaving growth volatile and vulnerable to shifts in external demand.

Moody’s also justified its negative outlook, which they say reflects uncertainties surrounding the trajectory for growth, the policy response, and the consequences for Macao's fiscal and external buffers.

“The government has expressed plans to diversify the economic base. But these are at an early stage of development, centering primarily around the execution of existing infrastructure efforts and on vertical diversification within the tourism sector itself. Lacking a track record of implementing such reform, there is a risk that these measures will not stem the deceleration in growth in the near-term nor diversify the economy over the medium-term.”

In March, Moody's had announced it would be reviewing Macau’s Aa2 government issuer rating, with the view to lower it due to declining gaming revenues. The review assessed the extent of prolonged gaming revenue decline in the gambling hub, as well as the SAR’s broader economic strength, balance of payments, and the government’s financial position.

At the time, Moody’s said it would likely lower the rating by one notch if the review concludes “that the government’s fiscal and external strengths will deteriorate relative to similarly rated peers, as the downturn progresses”.

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