Fitch Ratings has downgraded Hong Kong’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘AA’ from ‘AA+’, according to a press release from the company.

Key Rating Drivers
The downgrade of Hong Kong’s IDRs and the Negative Outlooks reflect the following key rating drivers:

Months of persistent conflict and violence are testing the perimeters and pliability of the „one country, two systems” framework that governs Hong Kong’s relationship with the mainland, underscored by mainland officials taking a more public stance on Hong Kong affairs than at any time since the 1997 handover.

Fitch expects the „one country, two systems” framework to remain intact, but the gradual rise in Hong Kong’s economic, financial, and socio-political linkages with the mainland implies its continued integration into China’s national governance system, which will present greater institutional and regulatory challenges over time.

In Fitch’s view, these developments are consistent with a narrowing of the sovereign rating differential between Hong Kong and mainland China (A+/Stable).

Ongoing events have also inflicted long-lasting damage to international perceptions of the quality and effectiveness of Hong Kong’s governance system and rule of law, and have called into question the stability and dynamism of its business environment. These features are integral to Fitch’s assessment of the territory’s creditworthiness, and while still strong in a global context, are at risk of being further eroded as a result of enduring social strife.

The Negative Outlook reflects our view that even with concessions to some protestor demands, a degree of public discontent is likely to persist. The potential for renewed eruptions of social unrest could further undermine confidence in public institutions, and tarnish perceptions of Hong Kong’s governance, institutions, political stability, and business environment.

A more challenging economic landscape has emerged as a result of the blow to domestic activity precipitated by continued unrest, as well as the already-existing external headwinds brought on by the US-China trade conflict.

Fitch now forecasts real GDP growth of 0% in 2019, implying an outright contraction during the second half of this year, and 1.2% in 2020. 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 expects Hong Kong’s considerable financial buffers to nevertheless remain intact. These include a large fiscal reserve equivalent to 40% of GDP, the territory’s status as the third-largest net external creditor among Fitch-rated sovereigns (283% of GDP), and a more than 20-year record of current account surpluses.

The agency also believes the authorities have ample resources to maintain the Hong Kong dollar peg to the US dollar, given foreign-reserve holdings of USD441 billion, equivalent to roughly 2x the monetary base. Other factors that continue to support Hong Kong’s credit profile include its strong record of public-finance management, high income levels, and its resilient and flexible economy.

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