Singapore, May 24, 2017 -- Moody's Investors Service has today downgraded Hong Kong's local
currency and foreign currency issuer ratings to Aa2 from Aa1 and changed
the outlook to stable from negative.
The announcement follows Moody's downgrade of China's rating to A1 from
Aa3 and change in the outlook to stable from negative. The downgrade
in Hong Kong's rating reflects Moody's view that credit trends
in China will continue to have a significant impact on Hong Kong's
credit profile due to close and tightening economic, financial and
political linkages with the mainland.
Hong Kong's local currency senior unsecured debt ratings are downgraded
to Aa2 from Aa1.
In a related rating action, Moody's has downgraded 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, to Aa2 from
Aa1. The payment obligations associated with these certificates
are direct obligations of the Government of Hong Kong, and their
ratings automatically reflect changes to Hong Kong's sovereign ratings.
Hong Kong's local currency bond and deposit ceilings remain at Aaa.
The foreign currency bond ceiling remains at Aaa. The foreign currency
deposit ceiling has been lowered to Aa2 from Aa1. Hong Kong's
short-term foreign currency bond and bank deposit ceilings remain
Prime-1 (P-1).
RATINGS RATIONALE
RATIONALE FOR THE RATING DOWNGRADE TO Aa2
TIGHT AND TIGHTENING LINKAGES BETWEEN HONG KONG AND CHINA
The economic and financial linkages between Hong Kong and China are close
and broad-based. Combined with political linkages,
this means that any erosion in China's credit profile, such
as that reflected in the 24 May downgrade of China's rating to A1
with a stable outlook, will ultimately affect Hong Kong's
credit profile and will be reflected in the Special Administrative Region's
(SAR) rating.
Directly, China accounts for more than half Hong Kong's exports
of goods, three quarters of tourist arrivals and 40% of exports
of services in general. Indirectly, Hong Kong is a very open
economy with exports, the vast proportion of which are re-exports,
accounting for nearly 190% of GDP. Combined with China's
rising share in world GDP and global trade, Hong Kong's very
high openness to global trade intensifies the effective economic links
between Hong Kong and China.
Financial linkages between Hong Kong and China are broad in nature and
large in the size of the assets involved. The Hong Kong banking
sector's exposure to mainland China increased further in the second half
of last year. Total mainland-related lending rose to HKD3.6
trillion at the end of 2016, up 3.5% compared with
last June, while other non-bank exposures also increased
by 11.4% to HKD1.2 trillion. High capital
and liquidity buffers and strong supervision mitigate but do not obviate
the risks related to banks' mainland exposure. At present,
however, asset quality is high, with a decline in the share
of mainland-related loans classified as "substandard",
"doubtful" or "at loss" to 0.8%
of total loans in December 2016.
Financial linkages are also being deepened through new financial market
infrastructure that is contributing to closer ties between Hong Kong and
China. The Shanghai-Hong Kong stock connect was launched
in November 2014; the Shenzhen-Hong Kong stock connect started
in December 2016; and a bond connect between China and Hong Kong
is to open by the end of 2017. While these connects bring benefits
including, it is hoped, enhanced liquidity, they also
risk introducing more direct contagion channels between China's
and Hong Kong's financial markets.
Through its involvement in various projects, including "One
Belt One Road" investments, Hong Kong's economy and
financial system will become increasingly closely related to China's.
The political linkages between Hong Kong and China are set out in Hong
Kong's Basic Law. The Hong Kong Chief Executive is accountable
to both the Central People's Government and the Hong Kong SAR in accordance
with the provisions of this Law.
Even in the absence of close contemporary economic and financial linkages,
Hong Kong's status as a Special Administrative Region of China would
imply close credit linkage and near proximity of ratings. The institutional
features which grant Hong Kong, at present, a degree of political
and economic independence -- together with the SAR's intrinsic
credit strengths -- allow Hong Kong's rating to exceed that
of China. But the two ratings, like the two regions,
remain closely linked. Indeed, the closer the linkage becomes,
whether through rising political influence or ever closer economic interdependence,
the more closely the two will converge.
Looking much farther ahead, in the latter phase of the 50-year
period envisaged in the "One Country, Two Systems" policy
(Article 5 of the Basic Law), certainty regarding the legal and
institutional arrangements that will apply post-2047 will increasingly
influence Hong Kong's institutional strength and competitiveness.
During this period, increasing convergence of key institutional
features, including the evolution and execution of public policy,
would in turn lead to the credit profiles of Hong Kong and China converging.
RATIONALE FOR THE STABLE OUTLOOK
Hong Kong's financial and institutional strengths support the stable
outlook on Hong Kong's rating. Large fiscal and external
buffers and a strong track record of effective fiscal and economic policy
provide ample flexibility to cushion the economy and financial system
against negative shocks.
In particular, Hong Kong's fiscal reserves rose to 38.3%
of GDP in March 2017, providing ample buffers against potential
negative shocks to GDP growth.
Moreover, foreign exchange reserves, covering more than seven
times the currency in circulation, consistently preserve the credibility
and viability of the Hong Kong dollar peg to the US dollar, thereby
contributing to financial stability in Hong Kong.
Furthermore, Hong Kong's Worldwide Governance Indicators are
very strong, with government effectiveness in particular ranked
third highest amongst the governments that we rate. A track record
of policy effectiveness, transparency and flexibility of economic
and fiscal policy support our view that the SAR's authorities would
remain vigilant and responsive to potential negative shocks.
Consistent with Moody's view on linkage to China, the stable
outlook on China's rating also supports that on Hong Kong's.
WHAT COULD CHANGE THE RATING UP/DOWN
The stable outlook denotes that the risks to Hong Kong's rating
are balanced.
Hong Kong's stand-alone credit profile would, absent
linkage to China, already merit a higher rating. Since it
is the linkage to China that constrains the rating, an upgrade would
only be likely were China's credit profile to improve, or
were Moody's to conclude that the linkage between the two ratings
had diminished, which is unlikely.
Conversely, Hong Kong's rating could be downgraded were China's
credit profile to continue to erode -- which the stable outlook on
China's rating suggests is unlikely in the near-term.
Or were Moody's to conclude that the linkage between the two credits
had increased, and Hong Kong's independence further eroded,
for example on the basis of evidence of increased intrusion from the mainland
in Hong Kong's political institutions and policy formulation process.
GDP per capita (PPP basis, US$): 58,233 (2016
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 2.0% (2016 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 1.2%
(2016 Actual)
Gen. Gov. Financial Balance/GDP: 4.4%
(2016 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 4.6% (2016 Actual) (also
known as External Balance)
External debt/GDP: 414.0% (2016 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 22 May 2017, a rating committee was called to discuss the rating
of the Hong Kong, Government of. Other views raised included:
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 not materially changed.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in December 2016. 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.
Marie Diron
Associate Managing Director
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
Atsi Sheth
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
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
