Moody's: Macao's credit profile reflects absence of government debt and fiscal surpluses

Moody's Investors Service says that the Government of Macao's (Aa3 stable) credit profile is underpinned by the absence of government debt and fiscal surpluses; factors which support the build-up of large fiscal reserves.

The stable outlook on the issuer rating balances prospects for more resilient growth ahead and the Special Administrative Region's (SAR) large financial buffers, against persistent vulnerability to sudden external shocks. Such shocks would likely stem from economic, financial and policy developments in China (A1 stable).

Moody's expects Macao's growth recovery to continue over the next two to three years on the back of growing gaming and non-gaming tourism.

However, Macao remains susceptible to potential policy measures in China. For example, a further tightening of China's anti-corruption crackdown and/or the introduction of gambling on the mainland would weaken gaming and tourism in Macao. As a small, open and concentrated economy, Macao's GDP growth will remain volatile.

Moody's conclusions are contained in its recently released credit analysis titled "Government of Macao -- Aa3 stable" and which examines the SAR in four categories: economic strength, which Moody's assesses as "moderate"; institutional strength "moderate (+)"; fiscal strength "very high (+)"; and susceptibility to event risk "low".

The report constitutes an annual update to investors and is not a rating action.

Moody's report points out that a recovery in gaming and tourism in Macao is supporting a return to robust GDP growth. The government's proactive loosening of fiscal policy proved effective at preventing an even deeper and longer downturn.

Moreover, the preservation of very large fiscal and external buffers through the economic downturn from early 2014 through to the middle of 2016 highlights the government's strong capacity to absorb economic shocks.

And, as implied by the stable outlook on the rating, credit risks are balanced.

Moody's could upgrade the rating upon evidence that the government's diversification plans — such as the expansion of non-gaming activities through family-oriented integrated resorts — are delivering stronger and more resilient GDP growth over a longer period of time than Moody's currently expects.

In addition, the successful implementation of reforms, such as a medium-term fiscal framework, which ensures fiscal buffers are preserved, would be credit positive.

Conversely, the rating would come under downward pressure from a renewed deep and prolonged economic downturn that leads to an erosion of fiscal buffers. Such a downturn would likely stem from Macao's strong financial, economic and political linkages with China.