Fitch Affirms HK at ‘AA+’; Outlook Stable

17-Sep-2014 Intellasia | Reuters | 6:00 AM Print This Post

Fitch Ratings has affirmed Hong Kong’s Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at ‘AA+’. The issue ratings on Hong Kong’s senior unsecured local currency bonds are also affirmed at ‘AA+’. The Outlook is Stable. The agency also affirmed the Short-Term Foreign Currency IDR at ‘F1+’ and Country Ceiling at ‘AAA’. KEY RATING DRIVERS Hong Kong’s key rating drivers are as follows: – Strong economic fundamentals: Hong Kong’s ratings are underpinned by a resilient and flexible economy, high income levels, and exceptionally strong public and external finances.

– Robust external finances: Hong Kong’s external finances are among the strongest across all Fitch-rated sovereign issuers. The territory is a large net external creditor amounting to 280 percent of GDP, and it has run a consistent current account surplus over the past decade. – Fiscal prudence: Hong Kong’s government has run a budget surplus for the past decade, and has consequently built up fiscal reserves equivalent to 35 percent of GDP as of March 2014. The territory’s outstanding stock of government debt (40 percent of GDP) is not fiscal in nature, and primarily constitutes notes issued by the Hong Kong Monetary Authority to facilitate its management of the currency board regime.

– Credible policy framework: The territory’s currency regime has been both consistent and credible over its more than 30-year history. The fiscal framework is similarly robust, as evidenced by a history of fiscal prudence and more recent long-term fiscal planning efforts.

– Rising Mainland China exposure: Fitch views Hong Kong’s rising exposure to Mainland China as bringing increasing risks as well as opportunities. Our estimates suggest that Hong Kong’s gross Mainland China exposure has grown by 5.7x over the past five years. As of June 2014, Fitch estimates gross Mainland China exposure was equivalent to 314 percent of Hong Kong’s GDP (from 70 percent in 2008) and 38 percent of its banking sector assets (from 11 percent in 2008). While exposures appear to be backed by assets and guarantees, bankruptcy procedures are still largely untested in China and there are significant doubts about collateral enforceability.

– Macroprudential risk: A surge in China-related lending and trade financing, supported by low interest rates, has caused Hong Kong’s banking sector assets to rise to 8.3x GDP in June 2014 (from 6.3x GDP in 2008). Domestic housing prices appear unbalanced from a fundamental supply/demand and affordability perspective, though direct risks to the banking sector in the event of a housing price correction appear limited given policy initiatives. Fitch views increasing Mainland China exposure as a significantly greater risk. – Vulnerability to external shocks: As is typical of a small open economy, Hong Kong is vulnerable to external demand shocks. RATING SENSITIVITIES

– Mainland China Risk: A transition away from debt-fuelled economic growth in Mainland China and a rebalancing of its economy toward consumption would be supportive for Hong Kong’s sovereign ratings. Conversely, further concentration of Hong Kong’s banking sector exposures to Mainland China would make it increasingly difficult to distinguish financial sector risks in Hong Kong from those in Mainland China and may result in negative rating action.

– Growth Shock: A severe economic contraction or a sharp sustained deterioration in economic growth in Mainland China, leading to broader economic and financial instability, would put downward pressure on Hong Kong’s ratings. – Political Disruption: A political disruption sufficiently large and prolonged to disrupt Hong Kong’s long-term economic growth prospects and/or independent status may result in negative rating action.

– Fiscal Deterioration: A sharp, structural decline in Hong Kong’s fiscal position, combined with a sizeable depletion in its fiscal reserves could trigger negative rating action. KEY ASSUMPTIONS – China avoids a hard landing and/or a banking sector crisis.

– Hong Kong’s business climate remains stable and attractive. – There are no severe disruptions to global economic and financial stability that could lead to a sudden halt in capital flows. – Hong Kong maintains the present currency board arrangement with the US dollar.


Category: Hong Kong

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