Fitch Ratings-Hong Kong-April 20:
Fitch Ratings has downgraded Hong Kong's Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'AA-' from 'AA'. The Outlook is Stable.
Key Rating Drivers
The downgrade of Hong Kong's IDRs reflects the following key rating drivers:
After prolonged social unrest in 2019, Hong Kong's economy is facing a second major shock from the emergence of the COVID-19 pandemic in January. Government and society-wide social distancing efforts to contain the virus's spread have led to a contraction in economic activity and rise in unemployment, prompting policymakers to announce the most expansionary budget in the territory's history. These challenges have compounded negative rating trends already in place from the reputational damage that anti-government protests were inflicting on international perceptions of Hong Kong's business environment and political stability.
Fitch forecasts real GDP will fall by 5% in 2020, following a 1.2% decline in 2019. High frequency data spanning 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. Efforts to contain the spread of the virus locally appear to be gaining traction, but risks to our forecast remain to the downside and dependent on the evolution of the pandemic globally, given Hong Kong's status as a small, open economy, with significant international trade and financial linkages. Fitch's baseline assumes growth recovering to 3.5% in 2021, alongside an expected rebound in global activity.
In April 2020, Hong Kong's Chief Executive announced a further round of economic relief measures totalling HKD137.5 billion (4.8% of GDP) to alleviate the pandemic's impact on employees, enterprises, and the public. This follows HKD120 billion (4.2% of GDP) in relief measures presented during the Financial Secretary's budget speech for the fiscal year 2020-21 that started on 1 April 2020 (FY20) delivered in late-February. Fitch forecasts the FY20 budget deficit will rise to 11% of GDP, more than double the prior post-handover record of 4.8% in FY01, and up from an estimated deficit of 1.5% in FY19. As a result, fiscal reserves will fall to 30% of GDP by end-FY20, from 40% at end-FY19, and are likely to decline further over the medium term in the absence of off-setting tax measures.
The anti-government protests, which grew increasingly violent in late 2019, appear to have temporarily receded amid the health crisis. At the same time, Hong Kong's deep-rooted socio-political cleavages remain unresolved, in Fitch's view. This injects lingering uncertainty into the business environment, and entrenches the risk of renewed bouts of public discontent, which could further tarnish international perceptions of the territory's governance, institutions, and political stability.
The downgrade also reflects Fitch's view that Hong Kong's gradual integration into China's (A+/Stable) national governance system and associated rise in economic, financial, and socio-political linkages with the mainland justify a closer alignment of their respective sovereign ratings. These established trends are exemplified by the central authorities taking a more vocal role in Hong Kong affairs than at any time since the 1997 handover.
Hong Kong's 'AA-' IDRs also reflect the following key rating drivers:
The territory's ratings remain underpinned by a strong record of public finance management, robust external buffers, high income levels, and a resilient and flexible economy.
Public finances will remain a rating strength, despite the large budget deficit this year. Fitch's estimate for general government debt of 41% of GDP largely reflects outstanding liabilities used to manage the currency board, which are not fiscal in nature. Excluding these obligations, Hong Kong's government debt burden of about 3% of GDP compares favourably with the historical medians of 40% and 42% for 'AA' and 'A' rated peers, respectively. In addition, years of accumulated budget savings means the current mix of expansionary fiscal policies will be largely funded by fiscal reserves, rather than government debt issuance. Fitch projects the budget deficit will narrow to 2% of GDP in FY21, as one-off relief measures are unwound.
External finances are robust, despite a sobering hit to international trade volumes since early 2019, which will be exacerbated by the massive retrenchment in global activity currently underway. At the same time, Fitch believes these challenges are unlikely to jeopardise Hong Kong's external balance-sheet strengths. The territory is the second-largest net external creditor among Fitch-rated sovereigns (about 276% of GDP), and will likely remain so given our forecast for the current account to remain in modest surplus this year.
The Hong Kong dollar has strengthened to a level approaching the strong-side of the convertibility band of HKD 7.75 per 1 USD since the onset of the health crisis. This reflects financial market participants' continued confidence in the Linked Exchange Rate System, which benefits from clear intervention guidelines, and is supported by USD438 billion in official reserve assets as of end-March 2020. At roughly 2x the monetary base, Fitch believes foreign reserves are more than sufficient to ensure the continued viability of the currency peg.
Fitch expects most Hong Kong banks' risk mitigation and buffers will be broadly maintained, despite near-term challenges from the pandemic. However, a prolonged outbreak that erodes bank capital buffers and/or liquidity could pressure Hong Kong's operating environment. Property prices have declined by about 7% since the onset of social unrest in mid-2019, and are likely to fall further, but Fitch believes potential spill-overs to the banking system would be cushioned by low loan-to-value ratios on new mortgages of about 55% and relatively low exposure to unsecured consumer lending.
ESG - Governance: Hong Kong has an ESG Relevance Score (RS) of 5 for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption, as is the case for all sovereigns. Theses scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model. Hong Kong has a medium to high WBGI ranking at the 87th percentile ('AA' median: 85th), in part reflecting a track record of peaceful political transitions, a moderate level of rights for participation in the political process, relatively strong institutional capacity and an established rule of law. However, recurring bouts of social unrest have inflicted long-lasting damage to international perceptions of Hong Kong's governance system and tested its political stability.
Sovereign Rating Model (SRM) and Qualitative Overlay (QO)
Fitch's proprietary SRM assigns Hong Kong a score equivalent to a rating of 'AA' on the Long-Term Foreign-Currency (LT FC) IDR scale.
Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to rated peers, as follows:
- Public Finance: +1 notch, to reflect that reported government debt mainly constitutes notes issued by the monetary authority to manage the currency board, and is not fiscal in nature. The territory's fiscal reserve also adds an additional buffer to the credit profile.
- Structural Features: -2 notches, to reflect Hong Kong's gradual integration into China's national governance system, and associated rise in economic, financial, and socio-political linkages with lower-rated mainland China (A+/Stable)
Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.
The main factors that could, individually or collectively, lead to positive rating action/upgrade:
- An improvement in mainland China's sovereign credit profile.
- Structural reforms that lead to enhanced growth potential and an increase in fiscal buffers.
The main factors that could, individually or collectively, lead negative rating action/downgrade:
- Deterioration in mainland China's sovereign credit profile.
- Further bouts of social instability sufficient to undermine Hong Kong's role as a leading international financial centre or the soundness of the business environment.
Best/Worst Case Rating Scenario
International scale credit ratings of Public Finance issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit
- The global economy performs broadly in line with Fitch's latest Global Economic Outlook.
- Hong Kong maintains the Linked Exchange Rate System with the US dollar, and its prescribed autonomy under the Basic Law and 'one country, two systems' framework.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Hong Kong has an ESG Relevance Score of 5 for Political Stability and Rights as World Bank Governance Indicators have the highest weight in Fitch's SRM and are highly relevant to the rating and a key rating driver with a high weight.
Hong Kong has an ESG Relevance Score of 5 for Rule of Law, Institutional Regulatory Quality and Control of Corruption as World Bank Governance Indicators have the highest weight in Fitch's SRM and are therefore highly relevant to the rating and are a key rating driver with a high weight.
Hong Kong has an ESG Relevance Score of 4 for Human Rights and Political Freedoms as strong social stability and voice and accountability are reflected in the World Bank Governance Indicators that have the highest weight in the SRM. They are relevant to the rating and a rating driver.
Hong Kong has an ESG Relevance Score of 4 for International Relations and Trade, as Hong Kong's relations with China and its deep economic, financial, and socio-political linkages with the mainland expose it to potential shocks. This is relevant to the rating and a rating driver.
Hong Kong has an ESG Relevance Score of 4 for Creditor Rights as willingness to service and repay debt is relevant to the rating and is a rating driver for Hong Kong, as for all sovereigns.
Hong Kong has an ESG Relevance Score of 3 for Human Development, Health and Education as managing the impact of the Covid-19 crisis is having an adverse impact on the economy and public finances, which is relevant to the rating in combination with other factors.
Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or to the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit
Hong Kong Sukuk 2017 Limited
----senior unsecured; Long Term Rating; Downgrade; AA-
Hong Kong; Long Term Issuer Default Rating; Downgrade; AA-; RO:Sta
----; Short Term Issuer Default Rating; Affirmed; F1+
----; Local Currency Long Term Issuer Default Rating; Downgrade; AA-; RO:Sta
----; Local Currency Short Term Issuer Default Rating; Affirmed; F1+
----; Country Ceiling; Affirmed; AAA
----senior unsecured; Long Term Rating; Downgrade; AA-
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Additional information is available on
Country Ceilings Criteria (pub. 05 Jul 2019)
Sovereign Rating Criteria (pub. 27 Mar 2020) (including rating assumption sensitivity)
Sukuk Rating Criteria (pub. 22 Jul 2019)
Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).
Country Ceiling Model, v1.7.1
Macro-Prudential Indicator Model, v1.4.0
Sovereign Rating Model, v3.11.0
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