Fitch Affirms Hong Kong’s Outlook as Stable
Fitch Ratings has affirmed Hong Kong’s long-term foreign- and local-currency issuer default ratings (IDRs) at AA+. The outlooks are both stable. The country ceiling has also been affirmed at AAA, and the short-term foreign currency IDR at F1+.
The credit ratings agency (CRA) added that Hong Kong’s sovereign creditworthiness is underpinned by strong economic fundamentals, particularly a flexible economy and robust public and external balances sheets.
Fitch said that Hong Kong’ economy remains in healthy shape despite the impact of slowing global trade. The supply-side flexibility of Hong Kong’s real economy is a valuable buffer against shocks. The unemployment rate stood at 3.2% in the three months ended August, which is helping to support domestic demand. Fitch projects Hong Kong’s real gross domestic product (GDP) to grow 1.2% in 2012 before accelerating to 3.7% in 2013, in line with the global recovery.
The Hong Kong government remains fiscally prudent. Although the authorities have eased fiscal policy to counter the economic slowdown, Fitch estimates that Hong Kong may still record a budget surplus of around 0.8% of GDP in FY2012-13 (end-March 2013), compared with 3.8% in FY2011-12. Continued budget surpluses will help preserve Hong Kong’s large pool of fiscal reserves, which stood at 33.4% of GDP at end-June 2012, and, in turn, provide robust support to the currency board arrangement and fiscal flexibility to absorb economic and financial shocks.
Hong Kong’s external finances remain exceptionally strong, which provide the economy with a valuable buffer during periods of elevated global risk aversion. Hong Kong’s net external credit position stood at over 280% of GDP in 2011, which is among the strongest in AA and AAA peers. Hong Kong is likely to continue registering current account surpluses, which should help to maintain its position as a large exporter of capital. However, Hong Kong’s current account surplus has been shrinking, as it fell to 5.2% of GDP in 2011 from 13.4% in 2008. Fitch estimates that it will decline to 3.5% for 2012.
The CRA also commented that elevated housing prices have renewed worries that Hong Kong could experience a repeat of the housing market collapse that occurred during the Asian financial crisis of 1997 to 2003. A wide range of macro-prudential and anti-speculation measures have been implemented, which are helping to slow down the rise in housing prices. These factors, combined with the strength of the banking system, should help to mitigate the risks associated with banks’ declining exposure to the domestic property market, which stood at 12.5% of system-wide assets at end-June 2012.
Fitch considers Hong Kong banks’ rapidly rising direct and indirect exposure to the mainland as a potentially bigger risk. Gross mainland China exposures stood at 26.4% of Hong Kong banking assets at end-June 2012. Although Hong Kong banks are stringently supervised and usually have collateralised exposures, certain risks associated with Chinese lending, such as lower transparency and corporate governance standards and collateral enforceability, are more difficult to contain.
Deepening trade and financial linkages between Hong Kong and mainland China leave the territory well placed to benefit from China’s economic growth and development. However, it also increases Hong Kong’s exposure to potential financial and economic volatility as China seeks to rebalance its economy and address banking sector weaknesses.
A material easing in China-related economic and financial sector risks, and in particular the avoidance of a ‘hard landing’ associated with an intensification of financial sector failings, would be beneficial for Hong Kong’s ratings. Similarly, an easing of risks over Hong Kong banks’ credit growth, prudent management of Chinese exposures and stabilisation of the housing market would be positive for the ratings.
Conversely, a weakening of financial stability arising from macro-prudential risks related to the rise in property prices, rapid credit expansion and greater as well as riskier mainland China exposures, would place negative pressure on Hong Kong’s ratings. Nonetheless, an unexpectedly sharp structural deterioration in public finances, which are consistent with AAA peers, and sustained erosion in fiscal reserves would place downward pressure on Hong Kong’s ratings.