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
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and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1263068.
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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
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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
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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.
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