Moody's downgrades Hong Kong's rating to reflect lower governance strength

The stable outlook at Aa3 reflects superior fiscal strength and consistent macroeconomic stability which Moody's expects to persist through a period of heightened uncertainty

MOODY's Investors Service downgraded the long-term issuer and senior unsecured ratings of the Government of Hong Kong to Aa3 from Aa2 on January 20 and changed the outlook to stable from negative.

In contrast, Fitch Ratings downgraded Hong Kong back in September 2019. The Fitch rating was lowered to AA from AA+ with a negative outlook.

The recent downgrade principally reflects Moody's view that Hong Kong's institutions and governance strength is lower than previously estimated.

The absence of tangible plans to address either the political or economic and social concerns of the Hong Kong population that have come to the fore in the past nine months may reflect weaker inherent institutional capacity than Moody's had previously assessed. It may also point to more significant constraints on the autonomy of the Special Administrative Region's (SAR) institutions than previously thought.

The stable outlook at Aa3 reflects superior fiscal strength and consistent macroeconomic stability, which Moody's expects to persist through a period of heightened uncertainty about political and social developments associated with weak or negative GDP growth.

Combined with the assessment that, albeit somewhat less strong, Hong Kong's institutions and governance remain markedly stronger than China's (A1 stable), these credit characteristics account for a one-notch sovereign rating gap between Hong Kong and China.

Moody's has also downgraded the senior unsecured foreign currency ratings of the Trust Certificates issued by Hong Kong Sukuk 2015 Limited, a special purpose vehicle established by the Government of Hong Kong, to Aa3 from Aa2. The payment obligations associated with these certificates are direct obligations of the government and rank side by side with other senior unsecured debt of the government.

Hong Kong's long-term foreign-currency bond ceiling and the local currency bond and deposits ceilings remain unchanged at Aaa, while the long-term foreign currency deposits ceiling has been lowered to Aa3 from Aa2. Hong Kong's short-term foreign currency bond and bank deposits ceilings remain unchanged at P-1.

The stable outlook at Aa3 reflects Moody's assessment that a one-notch gap between Hong Kong's and China's rating will likely persist for the foreseeable future. In particular, Hong Kong's rating is supported by "aaa" fiscal strength that Moody's expects to be resilient to a period of low or negative growth, and a very high likelihood that macroeconomic stability will be preserved.

Moreover, while Moody's assessment of the strength of Hong Kong's institutions and governance is now somewhat weaker than previously, it remains markedly stronger than China's at "baa1".

Hong Kong's minimal government debt burden and large fiscal reserves continue to support "aaa" fiscal strength. While Moody's expects government debt to rise modestly due to fiscal policy easing in a context of a sharp economic slowdown, it will remain very low. Fiscal reserves of HK$1.2 trillion (around 40% of GDP) in fiscal 2019/20 (the year ending March 2020) represent a material buffer to address long-term structural issues, or absorb the current and future periods of slow or negative growth.

Moreover, ample foreign exchange reserves contribute to macroeconomic stability for a small, open economy and large financial centre and support the credibility and viability of the currency peg. In Hong Kong's past, and during the current recession and period of political, social and economic uncertainty, the peg's credibility has remained strong. This track record supports Moody's view that the Hong Kong Monetary Authority (HKMA), the central bank, will maintain macro-economic stability.

Date

21 Jan 2020

Channel

Treasury

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