Bangkok--11 Oct--Moody's Investors
Moody's Investors Service has placed the Aa2 government bond ratings of the Hong Kong Special Administrative Region on review for possible upgrade. In addition, the Aa2 foreign currency bank deposit ceiling and the Aa1 foreign currency bond ceiling were also placed on review.
The main driver for placing the ratings on review was Moody's placing of the Chinese government's A1 bond rating on review for possible upgrade today. Also considered in the decision to place Hong Kong's ratings under review were the following factors.
(1) The prospects for continued and improving government financial strength, particularly in comparison to other sovereigns rated at the same level;
(2) The lessening vulnerability to external shocks, as demonstrated by the continued health of the financial sector through the global crisis and the increases in the Special Administrative Region's external financial assets;
(3) Favorable prospects for Chinese economic performance in the coming few years, providing support to economic growth and financial developments in Hong Kong.
RATINGS RATIONALE
Moody's believes that, as a Special Administrative Region of China, Hong Kong's ratings should be linked to, although not necessarily the same as, China's. At present there is a two notch differential, which Moody's believes appropriately calibrates the underlying economic and financial contagion risks from the mainland to the SAR. Unlike other subsovereigns, the SAR government has a separate currency, international reserves, legal system, and foreign exchange regime. The review for upgrade is based both on today's placing of China's ratings on review and also the strengthening fundamentals in Hong Kong itself.
"Hong Kong's fiscal indicators are among the strongest of the countries and regions rated by Moody's, despite some revenue volatility," said Steven Hess, a Moody's Senior Credit Officer who is lead analyst for Hong Kong's ratings. "The global financial crisis affected the government's finances, but the existence of large fiscal reserves meant that the budget deficit could be financed without debt issuance." Hong Kong's government has only a minimal amount of debt, and the budget is expected to return to surplus within three years, while fiscal reserves are equivalent to about 18 months of government expenditure.
Although a number of highly rated countries experienced serious banking-sector difficulties as a result of the recent financial crisis, Hong Kong's banks proved comparatively resilient, and the government, although establishing a temporary facility to provide capital to the banks if needed, was not actually required to use this facility. "In addition, the government's fiscal reserves and the large foreign assets of both the government and the private sector provide Hong Kong with a cushion against potential external shocks," added Moody's Hess. "The prospects for further increases in the SAR's net foreign assets are positive."
Going forward, economic developments in Hong Kong will be strongly influenced by the pace of growth in China. Financial relations between the SAR and the mainland are deepening as Chinese demand for Hong Kong's financial and professional services increases. With the Chinese economy expected to grow relatively rapidly, this demand should expand further over time. In addition, as an intermediary for trade between China and the rest of the world, Hong Kong will continue to benefit from rising trade volumes, even as infrastructure is developed elsewhere in China.
Hong Kong remains vulnerable to unexpected events in the mainland as a result of political or economic shocks. However, Moody's high rating of China itself indicates the agency's evaluation that such events have a low probability.
The principal methodology used in rating Government of Hong Kong was Sovereign Bond rating methodology published in September 2008. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.
Moody's Last rating action concerning Hong Kong was on November 9, 2009, when a positive outlook was assigned to the Aa2 government bond ratings.