Macau has remained largely unaffected by the slowdown in China, highlighting the economy's underlying credit resilience, says Fitch Ratings.
Stronger-than-expected economic performance so far this year is underpinned by a competitive gaming industry and continuing strength in income growth in neighbouring China - the largest origin of visitors for tourism and gaming-dependent Macau.
Macau's real GDP was up by 10.5% year-on-year in H113. Activity was boosted by a 16% surge in gaming revenue (in line with the pace from a year ago), and reflected in the steady rise in tourism and service exports. We now see upside risk to our full-year forecast of 8.5% growth.
A key reason for the growth outperformance has been the strong flow of visitor arrivals. In the first seven months of this year, overall visitor arrivals were up 4% over the same period the year before, with those from China up 10% - higher than the 7% a year before.
The share of Chinese tourists now accounts for about 60% of the total. Therefore the inflow and spending proclivity of Chinese tourists has become increasingly important for the health of Macau's gaming industry, and its overall economy.
Macau's numbers shed light on the broader issue of China's economic health and rebalancing.
Fitch believes that a fundamental aspect for China to successfully rebalance, without raising credit concerns, is for consumption growth to hold up. Macau's numbers, although reflecting only a small part of the story, nonetheless point to steady Chinese household consumption.
Another reason for Macau's resilience is the rising importance of the mass market business in its gaming sector. This increasingly insulates the economy from a downturn in the VIP segment which is more susceptible to an official crackdown on shadow banking in China. Additional infrastructure improvement and the development of Henqin Island should support mass market growth in excess of VIP growth for the foreseeable future.
Moreover, the gaming industry remains supply-constrained relative to demand. This provides a buffer, and allows operators to re-segment capacity toward either the mass market or VIP segment.
Finally, casino operators' healthy balance sheets provide scope to subsidise financing to VIP junkets in the event of a downturn in activity.
The upshot is that Macau's economy and credit profile have remained firm despite its heavy reliance on the gaming sector and high exposure to China country risk.
This reflects a reasonably steady consumption picture in China as well as intrinsic industry strengths, which provides a buffer against any unexpected downturn.