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Fitch Affirms Macao at 'AA-'; Outlook Stable
February 27, 2017 / 8:56 AM / in 9 months

Fitch Affirms Macao at 'AA-'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG, February 27 (Fitch) Fitch Ratings has affirmed Macao's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'AA-' with a Stable Outlook. The Country Ceiling is affirmed at 'AA+' and the Short-Term Foreign- and Local-Currency IDRs at 'F1+'. KEY RATING DRIVERS The affirmation reflects the following key rating drivers: Macao's ratings are underpinned by the territory's credible policy framework and exceptionally strong public and external finances, which continue to strengthen despite three consecutive years of economic contraction. The ratings are constrained by Macao's high GDP volatility, elevated concentration to the gaming sector and tourism from mainland China, as well as its susceptibility to changes in China's broader policy environment. Macao's economy is beginning to rebound, with real GDP expanding by 4.4% in 3Q16 and 7.0% in 4Q16. The large contraction in 1H16 left real GDP growth for full-year 2016 negative, at -2.1%, but Fitch expects a pick-up to 2.5% in 2017 supported by improving gaming revenues from new casino openings. Data suggests the VIP and mass-market customer segments recorded positive growth in 4Q16, increasing the likelihood of a recovery this year. The territory's budget remains in strong surplus despite the recession. Fitch estimates the 2016 budget surplus was 6.2% of GDP, above the government's original budget estimate of 1%, due to a higher gaming revenue intake. The government's 2017 budget projects a surplus of MOP5.6bn (1.5% of GDP), based on flat gaming revenues relative to their 2016 budget assumption. Fitch forecasts a 2017 budget surplus of 5.0% of GDP, reflecting the agency's expectations of roughly 6% gaming revenue growth in 2017. Macao has no outstanding government debt and prudent expenditure management during the gaming boom allowed the territory to accumulate large fiscal buffers. Fitch estimates fiscal reserves, including a provisional portfolio that holds about two years of accumulated government surpluses, grew to 137% of GDP at end-2016, equivalent to 5.7x the projected 2017 budgetary expenditure. Macao's fiscal strengths are further supported by a Basic Law requirement for the territory to maintain balanced budgets or modest surpluses. External finances are among the strongest across Fitch-rated sovereigns and represent a key support to the rating. The agency forecasts the current account surplus to rise to 28% of GDP in 2017, up from an estimated 27% in 2016, due to the modest gaming revenue recovery we are expecting this year. Sovereign net foreign assets, which include fiscal and foreign-exchange reserves, are the fifth highest globally, at roughly 180% of GDP as of end-2016. Fitch sees the currency board arrangement as a credible policy anchor, with adequate foreign reserve coverage equivalent to 4x the base money supply. Macao's principal rating constraint is its high concentration to the gaming sector, which continues to represent about 48% of GDP and 21% of employment - despite authorities' efforts to increase the economy's diversity. The territory also has a high reliance on mainland Chinese tourists, who account for two-thirds of total visitor arrivals and an even larger share of visitor spending. These two risks have contributed to Macao's high GDP growth volatility and increase the economy's vulnerability to changes in China's broader policy environment, including changes to visa regulations or the legalisation of gaming in other Chinese territories - although we do not expect the latter to occur in the near term. Fitch sees the mainland China exposures of Macao's banks as a potential risk, although their non-performing loan ratio was a low 0.03% at end-1H16. The agency estimates that mainland China exposures accounted for 33% of banking system assets at end-1H16, up from 26% at end-2015; the highest proportion among the eight Asian economies captured in our periodic survey. Nevertheless, risks to the sovereign balance sheet are mitigated by the fact that Macao's banking sector is almost entirely foreign owned. In addition, a significant proportion of exposures are to mainland Chinese banks in the form of parent bank guarantees, direct placements and other short-dated trade finance claims, such as discounted letters of credit. SOVEREIGN RATING MODEL and QUALITATIVE OVERLAY) Fitch's proprietary sovereign rating model (SRM) assigns Macao a score equivalent to a rating of 'AA-' on the Long-Term Foreign-Currency IDR scale. Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final Long-Term Foreign-Currency IDR by applying its qualitative overlay (QO) relative to rated peers, as follows: - Public finances: +1 notch to reflect zero public debt, large fiscal reserves and a strong fiscal policy framework. - Macro: +1 notch to offset excessive penalisation in the SRM due to Macao's exceptionally high GDP contraction in 2015. - Structural features: -2 notches to reflect the combination of high concentration risk to the gaming industry and mainland China, as well as Macao's macro-prudential indicator score of 3. Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a Long-Term Foreign-Currency IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable or reflected in the SRM. RATING SENSITIVITIES The main factors that could lead to negative action, individually or collectively, include a: - A severe economic shock from China, in light of the close economic and financial linkages. - A sustained decline in gaming revenues, particularly if this leads to erosion of the sovereign balance sheet. - A sharp deterioration in financial-sector stability. The main factor that could lead to positive rating action is diversification of the economy into sectors less reliant on gaming and China. KEY ASSUMPTIONS - China avoids a hard landing or banking sector crisis. - Macao maintains the high degree of autonomy provided to it under the Basic Law. Contact: Primary Analyst Andrew Fennell Director +852 2263 9925 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Secondary Analyst Mervyn Tang Director +852 2263 9944 Committee Chairperson Jan Friederich Senior Director +852 2263 9910 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria Country Ceilings (pub. 16 Aug 2016) here Sovereign Rating Criteria (pub. 18 Jul 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1019756 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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