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Rating Action:

Moody's affirms Hong Kong's Aa2 ratings, maintains stable outlook

 The document has been translated in other languages

05 Jul 2019

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

No Related Data.
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