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Rating Action:

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

17 May 2021

Singapore, May 17, 2021 -- Moody's Investors Service, ("Moody's") has today affirmed the Government of Macao's local and foreign currency issuer rating at Aa3 and maintained the stable outlook.

According to Moody's, Macao's economy has been the worst-hit by the coronavirus globally, with a collapse in tourist arrivals resulting in a precipitous fall in gaming revenues. At the same time, Macao's fiscal reserves remain ample, allowing the Special Administrative Region (SAR) to deploy them to support the population.

The Aa3 rating reflects a balance between inherent credit constraints and strengths. The growth volatility of Macao's economy is among the highest of all rated sovereigns. While efforts to diversify growth away from the gaming industry have been ongoing since 2015-16, Moody's does not expect them to yield material results over the near-term. But despite the highly volatile nature of economic growth, Macao's vast fiscal and external reserves -- significantly stronger than those of similarly rated peers - and very high per capita incomes continue to support its credit profile.

The stable outlook reflects Moody's expectations that economic activity will likely be restored to pre-pandemic levels by 2024, spurred by a recovery in the gaming sector, and that the impact on the labor market, while severe, will not be permanent.

Macao's country ceilings remain unchanged: Macao's local-currency country ceilings remain at Aaa. The three-notch gap to the sovereign rating reflects the high composition of a single-industry in overall revenues, offset by strong institutional and policy capacities and a very strong external position. The foreign-currency ceiling remains at Aaa, reflecting Moody's assessment of negligible transfer and convertibility risks and strong policy effectiveness.

RATINGS RATIONALE

RATIONALE FOR THE Aa3 RATING

FISCAL AND EXTERNAL BUFFERS REMAIN AMPLE, PROVIDING MATERIAL CREDIT SUPPORT

With an economy and revenue base highly reliant on gaming, the sudden stop in tourism flows as a result of the global coronavirus shock has hit Macao hard. The collapse in gaming revenues resulted in real GDP falling over 56% year-on-year in 2020.

However, Macao's vast fiscal and external buffers have allowed it to deploy significant stimulus measures over the course of the past year. Total fiscal stimulus amounted to MOP 52.6 billion, or 27% of GDP in 2020, and a further 12% of Moody's estimated GDP in 2021. These measures have limited the impact of the slump in economic activity on domestic demand.

Fiscal measures and the fall in revenues resulted in the fiscal surplus falling from 12.6% of GDP in 2019 to 1.7% of GDP in 2020. In order to finance the stimulus, the government also dipped into its fiscal reserves, drawing down MOP 47 billion in 2020 and supplementing its capital revenues with this sum.

In 2021, the SAR has budgeted a continued drawdown in reserves of MOP35.7 billion, or 15.1% of Moody's estimated GDP.

Moody's expects that the drawdowns in 2020 and 2021 will be reflected in lower reserves over the course of the following years, although the overall reserve position will remain strong. The absence of public debt and persistently large fiscal surpluses of past years have allowed the SAR to accumulate total fiscal reserves of MOP 616 billion as of end 2020, more than 7 times of 2019 public expenditure, or over 138% of 2019 GDP.

Given that the Basic Law stipulates that Macao run balanced budgets, Moody's expects that the SAR will gradually move to equilibrate the fiscal position. This, coupled with an improvement in gaming revenues will result in a continued build-up in fiscal reserves going forward.

The government also has public sector deposits in the banking system, which amounted to MOP 413 billion in 2019, representing more than 5 years of 2019 public spending.

External buffers remain sizeable. Despite recording a current account deficit of 13.8% of GDP in 2020, total foreign reserves edged higher, to MOP 201 billion or $25 billion at the end of 2020 (from $22.2 billion at end 2019), likely backed by investment returns on reserves and an increase in financial account inflows. Moody's expectation of a reversion to current account surpluses this year will support continued increases in the foreign reserve position.

GROWTH VOLATILITY REMAINS A CREDIT CONSTRAINT, PARTLY OFFSET BY POLICY EFFECTIVENESS

Embedded in Moody's assessment of Macao's credit profile is its very high growth volatility, which acts as a structural constraint on the SAR's economic strength. Measured by the standard deviation of real GDP between 2010 and 2019, Macao had the most volatile growth among all rated sovereigns, behind only Bermuda and Venezuela.

Growth volatility stems from a highly concentrated economic structure, with gaming and tourism constituting half of nominal growth. There is a strong degree of interdependence between the two industries, since gaming revenues are derived from tourists, and about 70% of visitor arrivals are from mainland China.

Macao's gaming industry is also vulnerable to slower growth in China and Chinese government policies, as well as to competition from neighboring destinations, such as Cambodia, Singapore, and Japan. Moreover, as an SAR under the 'one country two systems' policy , Macao's credit profile is closely tied with that of China's across economic, institutional, and political aspects. Macao's GDP growth is closely linked to a recovery in China, including to a vaccination drive in the mainland, which would allow for a relaxation in travel restrictions. Conversely, a stunted growth recovery or a renewed wave of infections in China would result in a delayed economic recovery in Macao. Policy measures in China that undermine Chinese demand for Macao's gaming and tourism would also significantly hinder the SAR's economy, as evidenced between 2014-16.

In recognition of these considerations, since the severe economic downturn in 2014-16, authorities have particularly focused on diversification away from the gaming sector. Such efforts have followed a three-pronged strategy of moving from high-end (VIP) gaming to mass-market gaming, from gaming tourism to nongaming tourism, and on improving the growth of the financial sector. Prior to the pandemic, these efforts were bearing fruit. However, the magnitude and global nature of the coronavirus shock has made it difficult for Macao to prove the benefits of still-nascent economic diversification efforts.

Even as Macao continues to press ahead with its economic diversification plans, Moody's does not expect to see a material shift in the composition of its economy over the course of the rating horizon. Economic diversification will involve not just regulating the scale of the gaming industry itself; but also expanding into other industries. While these efforts are underway -- particularly into the financial sector --scope of rapid development is limited, given competition from other cities in the region. Moreover, there remains a higher likelihood that any diversification will occur within, rather than outside of, the gaming and tourism sectors, thus leaving broader exposure largely unchanged.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook reflects balanced credit risks, including Moody's view that economic activity will likely be restored to pre-pandemic levels by 2024, spurred by a recovery in the gaming sector.

Under Moody's assumptions, a full recovery in tourist arrivals -- and therefore, gaming revenues -- will not occur until early 2023. These assumptions are underpinned tourist arrivals gradually recovering in the second half of this year, such that total arrivals will still remain about 60% below pre-coronavirus levels in 2021, before improving to record a 25% shortfall in 2022 and an increase relative to pre-pandemic levels only in 2023. The ensuing economic upturn is likely to track the recovery in tourist arrivals, since relaxations of travel restrictions with China will result in an upturn in gaming revenues as pent-up demand returns. Structural changes underway - even prior to the pandemic - to promote economic diversification, as described above, are further supportive of a recovery.

Moreover, the structure of the labor market, where the most impacted industry -- gaming - is more reliant on foreign labor while the resident labor force is generally protected through government measures, means that the degree of long-term labor market scarring is limited. The government's fiscal firepower has allowed it to deploy cash transfer programs even while developing employment retention and retraining programs, which will mitigate the impact on post-pandemic labor market scarring. This is evidenced by an unemployment rate, which at 2.9% as of March 2021, has ticked upward from rates at the end of 2019, but remains below peaks seen during the global financial crisis and lower than seen across the region and in other impacted economies, and a limited fall in private sector consumption growth.

Public investment is also supportive of a growth recovery. Macao's fiscal reserves remain sufficient for the government to continue to support growth, including through public sector infrastructure investment. Over the course of 2021 and beyond, key infrastructure projects will include construction of the Light Rail Transit (LRT) East Line, the LRT Hengqin Port Connection and the fourth Macao-Taipa cross-harbour route, the expansion of Macau International Airport, remodeling part of Taipa Ferry Terminal; and construction of roads and infrastructure in New Urban Zone Area A.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS

Macao's ESG Credit Impact Score is (CIS-2), reflecting neutral to low exposure to environmental and social risks, and a strong governance profile that supports the sovereign's credit rating, resilience and capacity to respond to shocks.

Macao's overall E issuer profile score is neutral to low (E-2). The main risk stems from Macao's exposure to physical climate change and episodes of extreme weather events, such as hurricanes and typhoons; as well as scarce natural capital. However, Macao's tourism industry is not weather-dependent, and it is well positioned to adopt climate adaptation strategies given the institutional, technical and financial resources at its disposal.

Moody's assesses Macao's S issuer profile score as neutral to low (S-2). Demographics pose negative risks, due to an aging population and a high proportion of migrant labor. However, this is balanced by very high per capita incomes and the provision of public services that are at par with advanced economies. Macao also retains considerable fiscal flexibility to accommodate an expansion of social spending including on health and education, and for elderly citizens.

Governance does not pose specific risks (G-2 issuer profile). This is reflected in both strong institutions and demonstrated policy effectiveness. Prudent macroeconomic and fiscal policies, which have resulted in the accumulation of a large stock of fiscal reserves, point to solid governance, despite structural challenges to policymaking given a small, open economy that is exposed to external shocks.

GDP per capita (PPP basis, US$): 124,904 (2019 Actual) (also known as Per Capita Income)

Real GDP growth (% change): -2.6% (2019 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 2.6% (2019 Actual)

Gen. Gov. Financial Balance/GDP: 12.6% (2019 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 33.6% (2019 Actual) (also known as External Balance)

External debt/GDP: 123.2% (2019 Actual)

Economic resiliency: baa2

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

On 12 May 2021, 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 decreased. The issuer's institutions and governance strength, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The systemic risk in which the issuer operates has not materially changed. The issuer's susceptibility to event risks has not materially changed.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

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, beyond current baseline expectations, that led to a significant and lasting erosion of fiscal and external buffers, in part because of an ineffective policy response. Measures by China that significantly tighten access to gaming for its citizens could be the trigger for such a shock.

The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631. Alternatively, 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 further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1263068.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

Anushka Shah
Vice President - Senior 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: 44 20 7772 5456
Client Service: 44 20 7772 5454

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.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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