Moody’s Investors Service has revised the outlook for Macau Special Administrative Region’s (SAR) ratings from stable to negative, citing its intimate connections with China, which has received a similar downgrade. The rationale behind the decision stems from the assessment of “tight political, institutional, economic, and financial linkages” between Macau and mainland China. While Moody’s affirms Macau’s Aa3 rating, reflecting substantial credit strengths, the negative outlook reflects concerns about the SAR’s vulnerability to China’s economic challenges.
Downgrade Triggers:
Moody’s downgraded China’s A1 rating from stable to negative due to its weakening economy, subsequently triggering a similar downgrade for Macau.
The rating agency highlights the significant political, institutional, economic, and financial ties between Macau and mainland China as factors contributing to the downgrade.
Dependency on China:
Macau’s large tourism and gaming sectors are heavily reliant on China, making them vulnerable to fluctuations in the mainland’s economic conditions.
The SAR’s banking system is also exposed to cross-border claims to the mainland, further emphasizing the interconnectedness of Macau’s economy with that of China.
Political and Institutional Linkages:
Moody’s notes that tighter political and institutional linkages have become more apparent in recent years, despite the maintenance of Macau’s policy autonomy under the “One Country, Two Systems” principle.
This evolving dynamic contributes to the narrow rating gap between Macau and China.
Retained Credit Strengths:
Despite the negative outlook, Moody’s affirms Macau’s Aa3 rating, recognizing formidable credit strengths, including very high per capita income and the absence of outstanding government debt.
Macau’s fiscal and external reserves, amounting to MOP$569 billion as of July 2023, provide strong buffers to absorb shocks and long-term challenges.
Concerns and Risks:
While Macau’s fiscal buffers are currently substantial, there are concerns that they may erode over time if the SAR’s growth prospects weaken.
Weaker economic activity, especially in the gaming sector, could lead to lower government revenue and services exports, posing risks to fiscal and current account surpluses.
Future Outlook:
Moody’s anticipates that Macau’s fiscal buffers will remain large in the near to medium term, but risks persist if growth prospects falter.
The SAR’s ability to mitigate challenges through expenditure restraint or economic diversification will play a crucial role in preserving its fiscal and external buffers.
Moody’s cautious outlook for Macau reflects the SAR’s susceptibility to China’s economic challenges and the intricate linkages between the two regions. While affirming Macau’s current credit strengths, the negative outlook underscores the need for proactive measures to safeguard against potential risks. As Macau navigates the complexities of its economic ties with China, maintaining fiscal resilience and exploring diversification strategies will be essential for long-term stability and growth.