|21 January, 2020

Moody's Hong Kong downgrade flunks Carrie Lam

The big question is whether the current government’s failures are more structural than individual

Anti-government protesters attend a rally to call for democratic reforms in Hong Kong, China January 19, 2020.

Anti-government protesters attend a rally to call for democratic reforms in Hong Kong, China January 19, 2020.

Reuters/Tyrone Siu

HONG KONG - Hong Kong’s Carrie Lam has received a flunking grade. Credit-ratings agency Moody’s on Monday cut the city’s rating down one notch, citing the leader’s feeble response to months of unrest. It’s a terse rejection of her stimulus plan, but Moody’s also indicted wider institutional inertia. That suggests economic revival will be difficult, whether Lam stays or not.

The latest downgrade follows peer Fitch, which in September flagged that months of anti-government protests and violence were “testing the perimeters and pliability” of the so-called One Country, Two Systems formula, which grants the former British colony a degree of autonomy from Beijing. Moody’s goes one step further: in a stinging rebuke to Lam, the firm hits at “the absence of an effective response” from the Chinese territory’s government to tackling the social and economic issues fueling discontent, describing Lam’s measures so far as “notably slow, tentative and inconclusive”.

This comes just a week after Lam unveiled a $1.3 billion fiscal stimulus package aimed at propping up the economy, which sank into a recession in the third quarter last year. Protests, which flared in June but have since dwindled in violence and scale, have battered the city’s tourism and shopping sectors, dragging November retail sales down almost 24% from a year earlier - the tenth consecutive month of decline. Lam’s proposed measures, which included extending transportation subsidies to those 60 and above and raising the number of statutory holidays, have underwhelmed. As Lam dithers, Hong Kong has managed to retain its top ranking for the world’s least affordable housing market for 2019, Demographia’s annual survey showed.

The big question is whether the current government’s failures are more structural than individual. Worryingly, Moody’s cites “weaker inherent institutional capacity” in the city than previously assessed. In the short term, that suggests fading confidence that the government is capable of bold action needed to revive the economy and diffuse political discontent, which entails addressing deep-rooted issues like housing affordability, social inequality and managing relations with Beijing. Lam’s failing grade is well-deserved, but the city’s next leader may not do much better.

CONTEXT NEWS

- U.S. credit rating agency Moody’s on Jan. 20 downgraded Hong Kong’s rating by on notch, from “Aa2” to “Aa3”, while moving its outlook to stable from negative.

- “The absence of tangible plans to address either the political or economic and social concerns of the Hong Kong population that have come to the fore in the past nine months may reflect weaker inherent institutional capacity than Moody's had previously assessed”, the agency said in a statement.

- Separately, Hong Kong’s leader, Chief Executive Carrie Lam, on Jan. 14 pledged HK$10 billion ($1.3 billion) in relief measures to prop up the economy. The proposed new spending brings the Chinese-ruled city's total stimulus to HK$35 billion since protests escalated in June. The measures target the elderly, unemployed and low-income residents, with plans to provide cash handouts among other benefits.

(Editing by Pete Sweeney and Katrina Hamlin)

© Reuters News 2020

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