Fitch warns credit rating depends on political, economic autonomy

Fitch Ratings yesterday affirmed the Macau SAR’s credit ratings (long-term foreign and local currency issuer default ratings) at “AA”, however it warned that they might not hold up if trends of economic integration in the Greater Bay Area are realized.
According to a statement issued by the Macau government, the reaffirmation of Macau’s “AA” rating, the third-highest rating offered, was “mainly because of the territory’s strong fiscal position for payment of financial commitments,” as well as the government’s fiscal prudence.
Official data shows the fiscal reserve is equivalent to 129% of the nominal gross domestic product of 2018, or over five years of the 2019 budgeted government expenditure. The SAR government also maintains its zero-debt status.
However, according to Fitch report released yesterday, the rating is in part due to Macau’s political and economic autonomy.
The rating “rests on the assumption that the territory’s governance, rule of law, economic policy framework, and business and regulatory environments remain distinct from that of the mainland,” noted Fitch in yesterday’s report.
“These assumptions are now evolving as China’s Special Administrative Regions (SARs) become more closely integrated into the national governance system, which has been accelerated by events in Hong Kong, as well as via policy initiatives such as the Greater Bay Area, which seek to enhance long-term regional growth opportunities by more closely integrating the economies of southern China.”
The AA rating on Macau currently sits two notches above that of mainland China (A+/Stable).
Meanwhile, the rating agency has revised the rating outlook to “negative” as the weakening performance of the tourism and gaming industry may dampen economic growth.
Fitch said that the ratings “are constrained by Macau’s high GDP volatility and narrow economic base, which largely consists of gaming tourism from mainland China.”
“The gaming industry represents 51% of aggregate activity and 22% of the employed population, despite efforts to diversify into other sectors. This elevated concentration to a single industry exposes the economy to shocks, and has contributed to Macau’s historically high level of GDP volatility.” DB