Bangkok--9 Nov--Moody's
Moody's Investors Service has changed the outlook on Hong Kong's Aa2 government bond ratings to positive from stable. Today's action was prompted by a corresponding move in China's rating outlook to positive.
Owing to Hong Kong's status as a Special Administrative Region (SAR) of China and because of the increasing financial and economic integration of the SAR and Mainland China, Hong Kong's rating is marginally lower than its intrinsic credit strength," says Steven Hess, Moody's lead analyst for Hong Kong.
"While Hong Kong's rating is separate from that of China, it is linked, and the residual China effect constrains Hong Kong's intrinsic upward rating potential. However, China's outlook change indicates that the level of hypothetical risk emanating from China has lessened which contributes to a positive rating outlook for Hong Kong."
Despite government budget deficits projected for the next few years, Moody's assesses the SAR's government financial strength as very high.
"The very low level of government debt and the large fiscal reserves underpin the high rating of the Hong Kong government," says Hess, a Moody's Vice President and Senior Credit Officer.
In addition, Hong Kong's high per capita income, institutional strength, separate currency and international reserves, and different legal system all justify a rating higher than that of China.
Hess notes that until now the rapid growth of the Chinese economy and specific measures taken by the central government to assist Hong Kong—including, for example, the Closer Economic Partnership Arrangement—have been positive for Hong Kong.
"However, the effects on Hong Kong of a very negative political or economic scenario in China have not been tested since the SAR was created.
While we do not foresee such a negative scenario in the near future, we do think that if such a scenario were to develop, it certainly could affect Hong Kong," says Hess.
Moody's last rating action with respect to Hong Kong occurred on July 26, 2007, when the government bond ratings were upgraded to Aa2 from Aa3.
The principal methodology used in rating Hong Kong was Moody's Sovereign Bond Ratings published in September 2008 and available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.
New York
Steven A. Hess
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service - New York NY
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