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Rating Action:

Moody's affirms Macao's Aa3 rating; maintains stable outlook

22 May 2019

Singapore, May 22, 2019 -- Moody's Investors Service ("Moody's") has today affirmed Macao's local and foreign currency issuer rating at Aa3 and maintained the stable outlook.

The key drivers of the rating affirmation are:

• Large and growing fiscal and external buffers will continue to provide Macao significant capacity to counter future shocks;

• Further progress on diversification toward non-gaming activities will, over time, support less volatile GDP growth

• Macao will remain susceptible to potential economic and policy measures from China that pose risks to its gaming and tourism sectors

The decision to maintain the stable outlook reflects balanced credit risks. On the upside, robust growth on the back of increasing gaming and tourism receipts, supported by the recent opening of the Hong Kong-Zhuhai-Macao bridge, may raise Macao's fiscal and foreign exchange reserve buffers even more than Moody's currently expects. Moreover, diversification into mass-market gaming and non-gaming tourism may be more rapid than currently assumed by Moody's, lowering the Special Administrative Region's exposure to shocks to the VIP gaming sector. On the downside, diversification could prove less effective leaving Macao exposed to shocks, particularly those related to economic, financial and policy developments on the mainland.

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 THE RATING AFFIRMATION AT Aa3

LARGE AND GROWING FISCAL AND EXTERNAL BUFFERS PROVIDE SIGNIFICANT ROOM TO COUNTER SHOCKS

Macao's large and growing fiscal and external buffers offer it significant capacity to withstand potential shocks.

Macao's persistent fiscal surpluses will continue to support the accumulation of large fiscal reserves, particularly in the absence of government debt. Fiscal reserve capital amounted to MOP566 billion (around $70 billion) as at end-March 2019, equal to about seven years' worth of public expenditure for 2018 or about 130% of 2018 GDP. Even through the economic downturn from 2014-2016, driven by a sharp decline in the gaming sector, Macao's fiscal and foreign reserves increased. Moody's expects ongoing growth in gaming and associated tax revenue to support further large fiscal surpluses above 10% of GDP in the next two years, indicating the government will continue to add to its stock of financial assets.

Macao's external finances will also strengthen as persistently strong current account surpluses support the build-up of reserves. Moody's forecasts the current account surplus to remain above 30% of GDP in 2019 and 2020, supported by increasing tourist arrivals and gaming revenues. New hotel and casino developments in the pipeline will bolster foreign direct investment inflows, although at lower levels than between the 2010-2014 period, when the gaming industry expanded very strongly. Moody's expects foreign exchange reserves will remain around 35% of GDP in the next two years.

INCREASING SHIFT TO NON-GAMING ACTIVITIES WILL, OVER TIME, SUPPORT LESS VOLATILE GDP GROWH

Progress on the government's diversification policies, including the ongoing shift toward non-gaming tourism and mass-market gaming from high-end VIP gaming, are starting to bear fruit and will, over time, ensure less volatile GDP growth.

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.

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. Mass-market gaming revenue rose to about 51% of total gaming revenue in the first quarter of 2019, up from around 34% in 2013.

Rising non-resident spending in areas such as shopping, accommodation and food and drink demonstrates continued growth in nongaming sectors. Moody's expects government policies focused on encouraging gaming operators to add more services in leisure, sports and recreation, conventions, exhibitions and cultural experiences will attract more mass-market visitors and expand revenue from non-gaming tourism.

Regional development initiatives such as the Greater Bay Area (GBA) that links Macao, Hong Kong and China will support the government's ongoing diversification plans. Reflecting this strategy, the Hong Kong-Zhuhai-Macao Bridge, which opened in October 2018, is making Macao more accessible for international visitors via Hong Kong's airport and holidaymakers from China's Guangdong province. Visitor arrivals by land rose sharply in the last quarter of 2018 to 6.9 million, an almost 40% year-on-year increase over the same period in 2017, and more visitors are coming from outside of China. Over time, greater movement of people and goods inside the GBA will facilitate expansion in Macao's tourism, trade and meetings and conventions industries.

MACAO'S CREDIT PROFILE WILL REMAIN VULNERABLE TO ECONOMIC AND POLICY DEVELOPMENTS IN CHINA

Macao's GDP growth is closely linked to growth in visitor arrivals from China. As a result, Macao remains exposed to shocks related to economic, financial and policy developments in China.

Should China's growth and incomes slow more sharply than Moody's currently expects, growth in non-gaming and gaming tourist volumes and revenues could slow markedly or become more volatile.

Policy measures in China that undermine Chinese demand for Macao's gaming and tourism would also significantly hinder the Special Administrative Region's economy, as evidenced between 2014-16.

The potential for escalating trade tensions between the US and China could pose further downside risks to investments by US gaming operators in Macao if they are targeted by retaliatory measures. Moody's consider these risks as low probability events that would have a high credit impact on Macao.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects balanced credit risks.

On the upside, robust growth on the back of increasing gaming and tourism receipts, supported by the recent opening of the Hong Kong-Zhuhai-Macao bridge, may raise Macao's fiscal and foreign exchange reserve buffers even more than Moody's currently expects. Moreover, diversification into mass-market gaming and non-gaming tourism may be more rapid than currently assumed by Moody's, lowering the Special Administrative Region's exposure to shocks to the VIP gaming sector. On the downside, diversification could prove less effective leaving Macao exposed to shocks, particularly those related to economic, financial and policy developments on the mainland.

WHAT COULD CHANGE THE RATING UP

Moody's would consider upgrading the rating upon evidence that the government's diversification plans are delivering stronger and durably more stable economic growth than the rating agency currently projects. That could stem from material and sustained progress on initiatives that support growth in non-gaming tourism offerings and further builds Macao's resilience to shocks.

WHAT COULD CHANGE THE RATING DOWN

Moody's would consider downgrading the rating if Macao endured a prolonged economic downturn that led to a significant and lasting erosion of fiscal and external buffers, in part because of an ineffective policy response.

GDP per capita (PPP basis, US$): 110,592 (2017 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 9.7% (2017 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 2% (2017 Actual)

Gen. Gov. Financial Balance/GDP: 11.1% (2017 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 33% (2017 Actual) (also known as External Balance)

External debt/GDP: 91.6% (2017 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 16 May 2019, 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 materially increased. 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 not materially changed.

The principal methodology used in these ratings was Sovereign Bond Ratings published in November 2018. 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

Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

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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