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Rating Action:

Moody's affirms Macao's Aa3 issuer rating; changes outlook to stable from negative

 The document has been translated in other languages

24 May 2017

Singapore, May 24, 2017 -- Moody's Investors Service has today affirmed Macao's local and foreign currency issuer ratings at Aa3 and changed the outlook to stable from negative.

The factors driving the rating affirmation and stable outlook are Moody's expectations that:

(1) The preservation of fiscal and external buffers, through a sharp economic downturn, provides significant room to counter future negative shocks;

(2) Ongoing progress on diversification bolsters prospects for more resilient GDP growth;

(3) Signs of policy effectiveness support institutional strength.

Macao's local currency bond and deposit ceilings are unchanged at Aa2. The long-term foreign currency bond ceiling is unchanged at Aa2. The long-term foreign currency bank deposit ceiling is unchanged at Aa3. The foreign currency short-term bond and deposit ceilings are also unchanged at Prime-1.

RATINGS RATIONALE

RATIONALE FOR RATING AFFIRMATION AT Aa3

FIRST DRIVER -- LARGE AND GROWING FINANCIAL BUFFERS PROVIDE SIGNIFICANT ROOM TO COUNTER POTENTIAL NEGATIVE SHOCKS

Macao's financial buffers, which remained intact even in the face of the recent economic downturn, provide the government with significant means to mitigate the economic impact of potential future shocks.

Despite the sharp contraction in GDP in recent years, Macao has extended its long track record of fiscal surpluses, leaving the government with zero debt and large fiscal reserves of around MOP472 billion ($59 billion) as of March 2017, equal to nearly six years' worth of 2016 public expenditures. We expect Macao will continue to run budget surpluses and accumulate fiscal reserves in coming years, albeit at a slower pace than before the downshift in gaming. Macao's larger fiscal buffers, when compared with many other similarly-rated sovereigns, support its very high fiscal strength.

External buffers will also continue to grow. We expect the current account surplus to increase to 28% of GDP in 2018, as gaming and tourism recover, remaining well above that of rating peers. This will continue to facilitate reserve accumulation, providing an additional strong buffer against external shocks.

Macao's economy is returning to growth following the sharp recession of 2014-16. Gross gaming revenues have been increasing on an annual basis since August 2016, boosted by the opening of two new casinos late last year and a recovery in tourism from China. With the economy recovering, we expect Macao to build additional buffers in coming years.

SECOND DRIVER -- SOME PROGRESS ON DIVERSIFICATION BOLSTERS PROSPECTS FOR MORE RESILIENT ECONOMIC GROWTH

Progress on the government's diversification efforts is ongoing and starting to bear fruit. Their successful implementation would help boost the shock-absorption capacity of the economy.

Macao's economic recovery partly reflects the increase in per-capita spending in areas such as shopping, dining, entertainment, accommodation, and meeting facilities. Recent hotel and casino developments, and forthcoming projects, will include greater non-gaming facilities to boost non-gaming revenues.

Ongoing construction of the Hong Kong-Zhuhai-Macao Bridge, the development of a new ferry terminal in Macao, and high-speed rail lines in China, and increased airline capacity will make travel to Macao more accessible, providing greater opportunities to increase tourism arrivals.

The ongoing shift to mass-market gaming, from VIP gaming, will support the profitability of gaming operators and enhance the resilience of the gaming sector. The share of mass-market gaming revenues increased in the first quarter of 2017 to around 44% of all gaming revenues, from about 27% in 2011.

Rising incomes in China and Macao's proximity to the mainland will continue to support demand for Macao's well-established gaming and tourism market, even in the face of growing competition from other parts of Asia.

THIRD DRIVER -- SIGNS OF POLICY EFFECTIVENESS SUPPORT INSTITUTIONAL STRENGTH

The loosening of fiscal policy in recent years effectively helped prevent an even deeper and longer downturn without eroding fiscal reserves. The government's increase in spending on social welfare, education and training and capital expenditures have supported non-gaming sectors, partly offsetting the decline in gaming.

Despite a sharp economic contraction and fall in tax revenues, Macao's ability to adhere to its balanced-budget rules, as indicated in the Basic Law, and prospects for this to continue, highlight institutional strength.

In addition, the Monetary Authority of Macao's supervision of the banking system contributes to financial stability. Macro-prudential measures, such as loan to value ratios, debt-servicing ratios, and a special stamp duty, are helping safeguard financial stability from potential risks in the real estate market. The prospects for continued financial stability bolster the ability of the authorities to effectively foster stable economic growth.

Balancing these strengths are challenges to policy effectiveness in a small economy vulnerable to sudden external shocks and the lack of a medium-term fiscal framework to anchor fiscal policy in the long run.

RATIONALE FOR STABLE OUTLOOK

The outlook change reflects our assessment that credit risks have become broadly balanced.

We expect Macao's economic recovery to endure over the next two to three years, supported by the ongoing diversification towards non-gaming activities.

Moreover, the government's healthy balance sheet offers it the means to support the ongoing economic transition and mitigate potential negative shocks.

However, Macao will remain exposed to a number of potential shocks, particularly those related to economic, financial and policy developments on the mainland.

WHAT COULD CHANGE THE RATING UP

The rating could move up upon evidence that the government's diversification plans are delivering stronger and more stable economic growth over a longer period of time than we currently project. The successful implementation of reforms, such as a medium-term fiscal framework, that ensure fiscal buffers are preserved would be credit positive.

WHAT COULD CHANGE THE RATING DOWN

Downward rating triggers could result from a renewed deep and prolonged economic downturn that leads to an erosion of fiscal buffers. Such a downturn could be related to external economic, financial and policy developments, particularly in China.

GDP per capita (PPP basis, US$): 95,286 (2016 Actual) (also known as Per Capita Income)

Real GDP growth (% change): -2.1% (2016 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 1.4% (2016 Actual)

Gen. Gov. Financial Balance/GDP: 6.1% (2016 Estimate) (also known as Fiscal Balance)

Current Account Balance/GDP: 27% (2016 Estimate) (also known as External Balance)

External debt/GDP: 95.4% (2016 Actual)

Level of economic development: High level of economic resilience

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 22 May 2017, a rating committee was called to discuss the rating of the Macao, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutional strength/ framework, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The issuer's susceptibility to event risks have decreased.

The principal methodology used in this rating was Sovereign Bond Ratings published in December 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Matthew Circosta
Analyst
Sovereign Risk Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Atsi Sheth
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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