Singapore, July 05, 2019 -- Moody's Investors Service has today affirmed Hong Kong's Aa2 long-term
issuer and senior unsecured ratings and maintained the stable outlook
on the ratings.
The Aa2 long-term issuer rating is supported by Moody's assessment
that Hong Kong's fiscal and external buffers remain very strong,
reflecting a minimal government debt burden, large fiscal reserves
and ample foreign exchange reserves. These buffers offer resilience
to shocks and negative long-term trends, including a rapidly
ageing population, a potential sharp slowdown in global trade,
and longer-term risks to the global trade and investment arrangements
in the context of the tensions between the United States (Aaa stable)
and China (A1 stable).
The stable outlook on Hong Kong's issuer rating reflects balanced risks
at the Aa2 rating level. Hong Kong is exposed to developments in
China, through economic, financial and political linkages.
Some of these developments present economic opportunities for Hong Kong,
for instance, in the newly set-up Greater Bay Area.
These linkages also present risks, in particular, if over
time or more suddenly, they lead to an actual or perceived erosion
of the institutional features that grant Hong Kong a degree of political
and economic independence from China.
Moody's has also affirmed at Aa2 the senior unsecured foreign currency
ratings of the Trust Certificates issued by Hong Kong Sukuk 2014 Limited
and Hong Kong Sukuk 2015 Limited, special purpose vehicles established
by the Government of Hong Kong. The payment obligations associated
with these certificates are direct obligations of the government.
The payment obligations represented by the securities issued by these
two special purpose vehicles are ranked pari passu with other senior,
unsecured debt issuance of the government. As such, ratings
for the sukuk issuance mirror the Government of Hong Kong's issuer rating.
Hong Kong's long-term foreign-currency bond ceiling
and the local currency bond and deposits ceilings remain at Aaa,
and the long-term foreign currency deposits ceiling remains at
Aa2.
RATINGS RATIONALE
RATIONALE FOR THE RATING AFFIRMATION
RATING INCORPORATES LARGE BUFFERS AGAINST SHORT-TERM AND LONG-TERM
STRUCTURAL CHALLENGES; LINKAGES WITH CHINA
Hong Kong's minimal debt burden and large fiscal reserves support resilience
to economic and financial shocks and strengthen the Special Administrative
Region's (SAR) ability to address structural challenges.
Ample foreign exchange reserves also contribute to macroeconomic stability
for a small, open economy and large financial centre.
The Hong Kong government's fiscal surpluses span more than a decade
and have been sustained through fluctuations in global growth that significantly
influence Hong Kong's economic environment. Hong Kong's
budget surplus stood at HKD67.9 billion in fiscal 2018/19 (the
year between 1 April 2018 and 31 March 2019, 2.4%
of GDP based on Moody's estimates), narrower than in the previous
fiscal year (HKD149.0 billion, 5.5% of GDP)
but higher than originally budgeted. In the next few years,
Moody's expects Hong Kong to continue to run small surpluses.
As a result, government debt will remain very low, at 3.7%
of GDP in 2018, mainly reflecting issuance to enhance market liquidity
rather than finance the government budget.
Besides low debt, the government estimates that the fiscal reserves
are worth HKD1.2 trillion (around 40% of GDP) in fiscal
2019/20, providing significant financial resources to address long-term
structural issues.
The effectiveness of policy aimed at preventing a rapid depletion of buffers
is likely to be tested in a slower growth environment, in the short
and longer term.
In the short term, even in a status quo on US-China trade
relations, which is Moody's baseline, continued uncertainty
around the US-China trade dispute will hurt Hong Kong directly
through slower trade, and indirectly through lower business investment
and consumer demand in Hong Kong. As a result, Hong Kong's
GDP growth rate will slow to 2.3% in 2019, before
recovering modestly to 2.7% in 2020.
Longer term, a sustained slowdown in global trade would negatively
affect Hong Kong's economy as a major trade hub. Hong Kong
also faces challenges in maintaining competitiveness. The World
Economic Forum Global Competitiveness Index for 2018 ranks Hong Kong seventh
of 140 economies. However, the SAR ranks below peers on innovation.
The 2019 budget includes initiatives aimed at boosting Hong Kong's
credentials as a regional innovation hub, supporting technology
companies and start-ups, and encouraging research and development;
measures which should help preserve competitiveness.
Furthermore, a fast ageing population poses a major long-term
challenge to Hong Kong's policymakers. It will lead to a
shrinking labour force and significantly raise ageing-related spending
needs by the government and the entire population. In the absence
of significant measures to mitigate these effects, Moody's
expects that population ageing will lead to a gradual reduction in fiscal
reserves over time. However, a sustained record of budgetary
prudence underscores the strength of Hong Kong's fiscal and policy
effectiveness, which provide the SAR with more time to design and
implement measures that will slow the rundown of its buffers.
The rating includes Moody's assessment of political risk for Hong
Kong that takes into account periodic challenges to the government's
policies in recent years, and particularly visibly currently in
large-scale protests by the population. Such protests are
part of the checks and balances in place in Hong Kong, that support
institutional strength. Signs that checks and balances weaken would
be a negative for Hong Kong's credit profile.
The Aa2 issuer rating and Moody's assessment of Hong Kong's
institutional strength also take into account evolving legal and institutional
arrangements for the 50 years envisaged in the "One Country, Two
Systems" policy (Article 5 of the Basic Law). The institutional
features, which grant Hong Kong a degree of political and economic
independence - together with its intrinsic credit strengths -
account for a higher rating for Hong Kong compared to China (A1 stable).
But the two ratings are closely linked, and the closer the linkage
between Hong Kong and China becomes, the more closely the two ratings
will converge.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook on Hong Kong's ratings reflects balanced risks at the
Aa2 rating level that mainly relate to the SAR's exposure to developments
in China and potential changes in the relationship between Hong Kong and
China.
Some of these developments present economic opportunities for Hong Kong,
for instance, in the newly set-up Greater Bay Area (GBA).
Closer economic and financial linkages into the GBA, which has a
population of more than 70 million people and makes up around 12%
of China's GDP, provide a potentially substantial increase
in market size for Hong Kong's goods and services, and a boost
to its role as a hub for access into mainland China for foreign investors.
These linkages also present risks. Should China's economy
slow rapidly, which is not Moody's baseline, Hong Kong
would be among those most severely affected globally, given the
very close economic linkages. Should the tensions between the US
and China escalate, Hong Kong as a major entry point for international
investment and trade flows to and from China, could be significantly
and durably affected.
Moreover, over time and as 2047, the end of the 50-year
transition period approaches, the risks also relate to a potential
actual or perceived erosion of the institutional features that provide
Hong Kong with a degree of political and economic independence and,
related to this, a comparative advantage vis-à-vis
large cities in the mainland. Such an erosion would likely result
in a weakening of Hong Kong's very high institutional strength and
a narrowing of the gap between Hong Kong's and China's ratings.
While the transition period will continue for many years and its outcome
has not been defined yet, Hong Kong's ongoing status as an
independent entity from China in many international settings, including
the World Trade Organization and in bilateral trade arrangements,
could be altered suddenly and much earlier than 2047 through unilateral
actions by some of Hong Kong's international partners. For
example, the United States Congress is considering making the status
of the United States-Hong Kong Policy Act conditional on its perceptions
of developments in the "One Country, Two Systems" policy,
under which Hong Kong was reunified with China. Repeal or amendment
of the Act could have major implications for the trade arrangements between
the US and Hong Kong, potentially with repercussions on Hong Kong's
relations with other partners, and significantly diminishing its
attractiveness as a centre for international trade and finance.
In this scenario, the rating gap between Hong Kong and China would
probably narrow.
WHAT COULD CHANGE THE RATING UP
Hong Kong's economic and financial metrics are very strong and,
absent linkages to China, could merit a higher rating. Consequently,
an upgrade would only be likely if Moody's were to conclude that
the linkage between China's and Hong Kong's ratings had weakened,
which is unlikely.
WHAT COULD CHANGE THE RATING DOWN
A downgrade of Hong Kong's ratings could occur, if China's credit
profile were to erode, or if a deepening in linkages between the
two credits were to lead Moody's to conclude that Hong Kong was becoming
more fully integrated with China's, implying an erosion in
the very high strength of Hong Kong's institutions and in the competitive
advantage of Hong Kong vis-à-vis large cities in
the mainland.
GDP per capita (PPP basis, US$): $64,216
(2018 Actual) (also known as Per Capita Income)
Real GDP growth (% change): 3.0% (2018 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 2.6%
(2018 Actual)
Gen. Gov. Financial Balance/GDP: 2.4%
(2018 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 4.3% (2018 Actual) (also
known as External Balance)
External debt/GDP: 466.6% (2018 Actual)
Level of economic development: Very High level of economic resilience
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 2 July 2019, a rating committee was called to discuss the rating
of the Government of Hong Kong. The main points raised during the
discussion were: The issuer's economic fundamentals, including
its economic strength, have not materially changed. The issuer's
institutional strength/framework have not materially changed. The
issuer's fiscal or financial strength, including its debt profile,
has not materially changed. The issuer's susceptibility to event
risks has increased.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in November 2018. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Martin Petch
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
