May 21, 2014 / 12:40 PM / 3 years ago

Fitch Affirms Macao at 'AA-'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG/LONDON, May 21 (Fitch) Fitch Ratings has affirmed Macao's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'AA-'. The Outlooks on the Long-Term IDRs are Stable. The Country Ceiling is affirmed at 'AA+' and the Short-Term Foreign Currency IDR at 'F1+'. KEY RATING DRIVERS The affirmation and Stable Outlook reflect the following factors: - A strong sovereign balance sheet and a track record of robust economic growth underpinned by a thriving gaming industry. A decade of strong growth has lifted nominal GDP per capita to twice the median for 'AA' rating category (sovereigns rated 'AA-', 'AA' and 'AA+'), while domestic savings at 74.8% of GDP are well above the 'AA' median of 36.8% of GDP. - A robust sovereign net foreign asset (SNFA) position that reached 108% of GDP at end-2013, greater than the 'AA' median of 85% of GDP. High SNFA reflects double-digit current account surpluses (estimated at 42% of GDP end-2013), which have helped drive a steady accumulation of international reserves, and a robust external component of fiscal reserve assets. - Public finances are a clear stand-out strength. The sovereign has no debt, domestic or external. Substantial fiscal surpluses, averaging 20.5% of GDP in the five years up to 2013 on Fitch's estimate, place it second only to Kuwait ('AA'/Stable) among Fitch's rated sovereigns when ranked by this metric. Cumulative fiscal surpluses have generated an estimated fiscal reserve of USD42.9bn at end-2013, equivalent to 83% of GDP, adding further strength to the rating. - Macao's average real GDP growth of 14.3% for the five years to 2013 far outperformed the 'A' and 'AA' medians of 2.7% and 3.3% respectively. Our current forecast horizon assumes that Macao's GDP will grow at an average rate of 9.8% in 2014-2015. This makes Macao the fastest-growing economy amongst its 'AA' rating peers, where average real GDP over the same period is expected to be much lower at 2.4%. However, Macao's limited range of macroeconomic policy levers is a weakness relative to rating peers. - Concentration risks weigh on Macao's rating. Macao's small, open and gaming-dominated economy is vulnerable to economic developments in mainland China - its dominant source of demand. A "hard landing" for China's economy is a low-probability but high-impact downside risk to Macao's gaming industry. Gross gaming revenues are equivalent to around 85% of Macao's GDP and gaming taxes were about 74% of integrated government revenue in 2012 (latest available). Nonetheless, Fitch recognises that being part of China offers significant economic advantages to Macao over the longer term. - Broadly balanced financial sector risks. Strong credit growth, a product of banks' rising exposure to China and the property sector, and high asset price inflation have manifested themselves in a Fitch Macro-Prudential Indicator score of '3', implying a potentially high risk of systemic stress. However, the system comfortably meets regulatory requirements (regulatory capital ratio of 15.5%), is liquid and profitable and enjoys a moderate loan-to-deposit ratio of 80% and negligible non-performing loans. - A largely foreign-owned banking sector limits risks to the sovereign balance sheet. However, 70% of total banking sector assets are owned by Chinese parent banks, potentially intensifying any external shock from mainland China (from either weaker-than-expected economic growth or banking sector stress). - As a small, open economy with a high degree of concentration risk, Macao is characterised by above-average volatility with respect to growth, inflation and government revenues. Macao's governance indicators also fall short of both 'AA' and 'A' rated peers. RATING SENSITIVITIES The main factors that individually, or collectively, could trigger a negative rating action include: - A severe economic shock from China could be negative for the ratings, given the close economic and financial linkages -A sharp deterioration in financial sector stability given increasing risks from rising house prices and exposures to mainland China The main factors that individually, or collectively, could trigger a positive rating action include: - Substantial further strengthening of Macao's sovereign balance sheet - A significant improvement in China's economic and financial sector risks KEY ASSUMPTIONS Fitch assumes Macao's economy remains highly concentrated in the gaming industry Fitch assumes China will have a smooth economic rebalancing process and avoid a "hard landing", as Macao's economy and its gaming industry are highly susceptible to China's economic performance Fitch assumes no substantial changes in China's policy towards gaming and tourism that could have a serious impact on Macao Contact: Primary Analyst Andrew Colquhoun Senior Director +852 2263 9938 Fitch (Hong Kong) Ltd 28th Floor, Tower Two, Lippo Centre 89 Queensway, Hong Kong Secondary Analyst Thomas Rookmaaker Director +852 2263 9891 Committee Chairperson Paul Rawkins Senior Director +44 20 3530 1046 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable criteria, 'Sovereign Rating Criteria' dated 13 August 2012 and 'Country Ceilings' dated 09 August 2013, are available at Applicable Criteria and Related Research: Sovereign Rating Criteria here Country Ceilings here Additional Disclosure Solicitation Status 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 WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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