Austerity measures announced by the government, possibly extended in the coming months, may end up hitting the already slowing domestic demand in the territory. This is the view of the Fitch rating agency that announced last Friday it was maintaining a ‘stable outlook’ on Macau’s AA- rating in spite of the 26.4 per cent year-on-year decline in Gross Domestic Product (GDP) for the second quarter. ‘There have been some signs that the domestic economy is beginning to slow. Household consumption and capital investment growth have fallen albeit from a high base. Government has also announced measures to tighten spending, which will help to mitigate the impact on the fiscal account but may squeeze domestic demand’, the rating agency report reads. Besides stressing the high dependency upon the gaming sector, the American agency commented on the future impact of the slowdown of the property market, which has been cooling down since the fourth quarter of last year. ‘Risks are also growing to income growth and to Macau banks’ loan growth, which could feed through to a further slowdown in the domestic property market’, they reported. ‘Macau’s banking sector benefits from conservative underwriting standards, which supports asset quality and relatively healthy capitalisation. Institutional support from Mainland Chinese parents in terms of capital, funding, and operations also provides a buffer to mitigate unexpected shocks’, they noted. Strong fiscal reserves The strong fiscal reserves are enough for the agency to consider that the territory is healthy enough to go through the changes of the gaming market, which are less VIP oriented and more mass market. The agency also notes the potential of the new Cotai resorts that can help attract more mass market visitors to the territory. ‘Yet, Fitch maintains a Stable Outlook on Macau’s AA- rating, reflecting the territory’s exceptionally strong sovereign balance sheet and external position. It has no debt liabilities, and retains fiscal reserves and accumulated surpluses in excess of 100 per cent of GDP – enough to almost cover six years of expenditure at the 2015 level projected by government’, the report reads. ‘This gives the territory significant policy space to accommodate a structural shift in the economy and support diversification away from the current reliance on VIP gaming’. During the course of this year, Fitch expects the economy of the territory to shrink by 16 per cent year-on-year, driven by the decline of gaming revenues, expected to be about 30 per cent. As at August, the decline stood at 36.5 per cent (MOP158.88 billion) but the agency is expecting a recovery during the second part of the year. Nonetheless there is a warning for investors that policies such as the ‘full smoking ban in casinos, restriction on Mainland visitor arrivals and a continued slowdown in the Chinese economy’ will slow down the recovery.
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