Fitch downgrades HK’s credit rating amid anti-government protest turmoil

07-Sep-2019 Intellasia | South China Morning Post | 6:02 AM Print This Post

One of the world’s biggest credit-rating agencies downgraded Hong Kong’s sovereign rating on Friday, as months of persistent conflict put the “one country, two systems” principle to the test, along with the city’s relationship with mainland China.

Fitch Ratings dropped the bombshell by downgrading the city’s rating one notch from AA+ to AA and the city’s outlook from stable to negative, which will have implications for the borrowing costs of companies and the government.

It said ongoing events had inflicted long-lasting damage to international perceptions of the quality and effectiveness of Hong Kong’s governance system and rule of law, and called into question the stability and dynamism of its business environment.

The city has been rocked for nearly three months by anti-government protests, sparked by opposition to a since-withdrawn extradition bill. The unrest has involved rallies, occupations, marches and strikes, many of which have ended in violent clashes between protesters and police.

The announcement was made just before the stock market closed at noon, with the Hang Seng benchmark index edging 157 points, or 0.59 per cent, higher in the morning session to 26,672.6.

Some analysts said the move could adversely affect government-backed enterprises such as rail operators MTR Corporation, and the Kowloon-Canton Railway Corporation, which are regular corporate borrowers and enjoy the same rating with the city.

Fitch is the first of the big three credit rating agencies to downgrade the city’s sovereign rating, with rivals S&P Global ratings, and Moody’s Investors Service, not yet taking any action. They are all American companies.

It is only Hong Kong’s second downgrade in rating by Fitch since 1995, still the latest rating means the third top investment grade.

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The rating firm pointed out that the ongoing demonstrations inflicted “long-lasting damage” to international perceptions of the quality and effectiveness of Hong Kong’s governance system, and rule of law, and has called into question the stability and dynamism of its business environment.

Fitch said these features were at risk of being further eroded by the continued civil unrest, even though in a global context, the city’s creditworthiness remained strong.

It said the city faced an even more challenge economic landscape, as protests dealt a blow to local business and the city’s economy, which has already been weakened by the trade war between the United States and China.

Fitch forecast the city’s gross domestic product would shrink to zero this year from 3 per cent growth last year.

“We also expect the budget surplus will narrow to roughly zero this year, in light of recently announced fiscal support measures, and our anticipation that revenues will underperform budget forecasts,” Fitch said.

Hong Kong is undergoing its worst political crisis since the handover of its sovereignty to China in 1997. The present crisis was triggered by the extradition bill, which would have allowed the transfer of fugitives jurisdictions the city did not have an agreement with, including mainland China.

On Wednesday, the city’s leader, Chief executive Carrie Lam Cheng Yuet-ngor, announced the legislation would be formally withdrawn, meeting one of the five demands made by anti-government protesters.

Despite the business community describing Lam’s move as an attempt to make peace, protesters have continued to demonstrate over the past two days, and have and threatened to block Hong Kong International Airport again on Saturday, as they press for the chief executive to meet their remaining four demands.

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These include an independent inquiry into the police’s use of force, and releasing protesters arrested or charged for taking part in past demonstrations.

Francis Lun Sheung-nim, chief executive of brokerage GEO Securities, said he was not surprised at the downgrade.

“Hong Kong has recently become chaotic,” he said. “The downgrade will hurt investors’ perception on Hong Kong and will affect major corporate borrowers.”

However, he does not think the downgrade will affect Hong Kong government too much on the back of its strong surplus.

Although S&P has not adjusted Hong Kong’s credit rating, it warned on Thursday of rising negative weight on the city’s banks, as the protests exacerbated the economic drag of the US-China trade war and the mainland’s slowing growth. But it expected Hong Kong banks would weather the impact.


Category: Hong Kong

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