Moody's Concerned With Impact Of Prolonged Decline In Macau's Gaming Sales

Moody's Investors Service has placed Macau's Aa2 government issuer rating on review for downgrade amid a drop in gaming revenues. This is a negative read-through for companies like Las Vegas Sands Corp. (NYSE: LVS), Wynn Resorts, Limited (NASDAQ: WYNN), MGM Resorts International (NYSE: MGM) and Melco Crown Entertainment Ltd (ADR) (NASDAQ: MPEL).

Macau is highly dependent on the gaming sector, which accounts for 59.1 percent of the SAR's economic output at current prices, more than four-fifths of its service exports, and three-quarters of total fiscal revenues.

"Our expectation of a prolonged decline in gaming revenues suggests that Macao's growth, fiscal and external metrics will likely deteriorate to levels below those consistent with its Aa2 rating," Moody's said in a statement.

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Between 2004 and 2014, growth in Macao's gaming industry supported average GDP growth of 12.5 percent year-on-year, more than triple the average for the Aa-rated median. However, a 34.3 percent decline in gaming revenues in 2015 resulted in a 20.3 percent drop in real GDP.

The decline in gaming revenues has been due to a fall in the number of tourists from the Mainland, for whom Macao's casinos are the primary attraction. This development owes, in turn, to the ongoing anti-corruption drive in China, which will likely result in a prolonged downturn in the gaming industry.

The review will allow Moody's to assess how much positive weight should be placed on Macao's strong fiscal buffers. As indicated, the government owes no debt and at over MOP 430 billion ($53.8 billion) at end-February 2016, its fiscal reserves amount to over 5 years of central account expenditures for 2015.

However, Moody's noted these funds could dwindle over the medium-term if they were to be used to fund possible future general government deficits beyond 2017.

Moody's would downgrade Macao's Aa2 rating if its rating review were to conclude that the government's fiscal and external strengths will deteriorate relative to similarly rated peers, as the downturn progresses.

Signs of emerging pressures might include a further sustained decline in gaming revenues, a larger-than-anticipated deterioration in the fiscal position, pressure on the currency board exchange rate and foreign-currency assets, or stresses in the banking system.

"In such a situation, the ratings impact for Macao would most likely be limited to one notch," Moody's added.

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