HONG KONG - The Hong Kong government said it is disappointed that international rating agency Fitch on Monday downgraded the city’s credit rating to "AA-" from “AA”.
After prolonged social unrest in 2019, Hong Kong's economy is facing a second major shock with the emergence of the COVID-19 pandemic in January, Fitch Ratings said in a statement.
Though acknowledging the city’s stable outlook, Fitch downgraded Hong Kong's long-term foreign-currency issuer default rating (IDR) to 'AA-' from 'AA'.
The city's social-distancing efforts to contain the spread of the virus have contributed to a contraction in economic activity and a rise in unemployment. This prompted the government to announce the most expansionary budget in history.
These challenges have compounded negative rating trends already in place due to the damage last year's anti-government protests did to Hong Kong's international reputation, Fitch said.
The Hong Kong SAR government said Fitch’s “decision reflects a disproportionate emphasis on prevailing socio-political issues without giving due recognition to the strong fundamentals underpinning the local economy and financial markets”
But the government disagreed with the rating agency, saying that Fitch’s “decision reflects a disproportionate emphasis on prevailing socio-political issues without giving due recognition to the strong fundamentals underpinning the local economy and financial markets.”
"The view that Hong Kong’s rising economic and financial ties with the mainland is credit negative is also ungrounded,” the government said in a statement on Monday.
The COVID-19 pandemic has dealt an unprecedented, severe blow to the global economy. The impact on Hong Kong is no more significant than on other places, it added.
"In fact, we have made a quick and effective response to tackle the epidemic and its impact on our economy," it stressed.
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Fitch forecast Hong Kong’s real GDP will fall by 5 percent in 2020, following a 1.2 percent decline in 2019. High frequency data covering retail sales, visitor arrivals, airport traffic and international trade have contracted sharply in early 2020, following declines in 2019, and are likely to remain weak through the first half of the year, it said.
Fitch said Hong Kong’s outlook depends on the evolution of the pandemic globally, given its status as a small, open economy, with significant international trade and financial links. Fitch's baseline assumes growth recovering to 3.5 percent in 2021 - along with an expected rebound in global activity.
The government said Hong Kong's fundamentals remained strong. "With our strong fiscal reserves standing at around 40 percent of GDP, we have rolled out massive relief measures of HK$287.5 billion (around 10 percent of GDP) with a view to preserving the vitality of our economy and helping our businesses and people endure the current hardship.
Our strong financial system with large buffers also underpins our resilience to severe and unexpected shocks
HKSAR govt
"Our strong financial system with large buffers also underpins our resilience to severe and unexpected shocks,” the government said.
Hong Kong’s financial markets and banking system have been functioning normally, it noted. The Linked Exchange Rate System continues to command confidence. "Banks are well capitalized and have a robust liquidity position."
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"The release of countercyclical capital buffers by the Hong Kong Monetary Authority, together with a series of measures with the banks, ensure the orderly functioning of the credit market, and provide a much-needed response to companies and households," the government statement read.
The view that Hong Kong’s economic and financial ties with the mainland were ''credit negative'' was highly questionable, it added.
“Indeed, Hong Kong will be in a better position to benefit from the mainland’s strong economic growth and new opportunities”, the statement said, citing the city’s roles as a ''facilitator'' and ''beneficiary” of important national development strategies, including the Guangdong-Hong Kong-Macao Greater Bay Area development and the Belt and Road Initiative, under the ''one country, two systems'' principle.
We must stress that, despite these unprecedented challenges, Hong Kong’s institutional strengths and core competitiveness remain unscathed
HKSAR govt
The success of the Stock Connect and Bond Connect in the past few years (average daily turnover up 90 percent and 82 percent, respectively, in the first quarter of 2020 compared to 2019) reflects this, it said.
Since its return to the nation, the SAR has been exercising ''Hong Kong people administering Hong Kong'' and a high degree of autonomy in strict accordance with the Basic Law of the HKSAR of the People's Republic of China.
The government said the ''one country, two systems'' principle had been fully and successfully implemented.
"The SAR government will continue to implement the 'one country, two systems' principle resolutely in accordance with the Basic Law," it noted.
"We must stress that, despite these unprecedented challenges, Hong Kong’s institutional strengths and core competitiveness remain unscathed. This includes the free flows of capital, goods and information and talent; a simple and low tax regime; a robust supervisory regime; the rule of law and an independent judiciary and quality professional services.
"The government will remain vigilant in assessing the economic impact of the internal and external environment, and will introduce timely measures to support Hong Kong's economic development.”
