Dagong Maintains the Credit Ratings of the Hong Kong Special Administrative Region of the People's Republic of China
Dagong Global Credit Rating Co., Ltd.
March 2, 2017
Dagong Global Credit Rating Co., Ltd. (“Dagong”) has decided to maintain both the local and foreign currency credit ratings of the Hong Kong Special Administrative Region of the People’s Republic of China (“SAR”, “Hong Kong”) at AAA, each with a stable outlook. Despite intensified political differences, social tensions and mounting downward pressure on the economy, under the framework of the Basic Law and the macro-prudential measures of the SAR government, the debt repayment environment of Hong Kong remains stable. With sizable fiscal reserves and foreign exchange reserves the debt burden upon the government is minimal. Therefore, the government’s local and foreign currency solvency remains extremely strong.
The principal reasons for maintaining the sovereign credit ratings of Hong Kong are as follows:
1. The debt repayment environment remains stable. Despite an increase in the number of seats held by pan-democrats in the Legislative Council Elections in September 2016 which has exacerbated social tensions, the political situation in Hong Kong remains stable under the framework of the Basic Law and the "one country, two systems" policy. While introducing policies to improve people's livelihoods and consolidate the advantages of traditional industries, the SAR government has promoted industrial diversification and developed scientific and technological industries. These efforts will alleviate the short-term economic downward pressure. At the same time, the government's prudential macro-control will sustain the resilience of the financial system.
2. Although the pressure of an economic downturn will build up in the short-term, Hong Kong will maintain its great long-term economy growth capacity. Influenced by the anemic global economic recovery and the Mainland’s economic slowdown, the decline in the number of tourists vis-à-vis increased tourism competition will continue to slow down activity in the tourism and retail sectors. The re-export trade and service exports will continue to be under pressure. Under a background of the Federal Reserve’s interest rate rise, Hong Kong has tightened its monetary policies and the real estate market has come under pressure. This will further curb consumption and investment. It is expected that Hong Kong's economic growth will slow to 1.7% in 2017. In the medium and long terms, Hong Kong has obvious institutional, geographical and industrial advantages. The development of innovation and technology, promotion of re-industrialization and the continuing process of integration with the Mainland’s economy will provide new opportunities for Hong Kong’s economic development. Therefore, Hong Kong’s average economic growth rate is expected to be 2.6% during 2018-2022.
3. In the short term, the fiscal surplus will narrow, but sufficient fiscal reserves will guarantee stable repayment sources for the SAR government. In the short term, due to the need to boost the economy and relieve social strains, tax reductions and other mitigation measures and increased spending on improving people’s livelihoods will cause the SAR government’s fiscal surplus to shrink further. It is thus expected that the fiscal surplus will be 1.5% in FY2017/18 and 0.1% in FY2018/19. In the medium term, a seriously aging population will increase the fixed expenditure of the SAR government, and structural deficits will appear. Nonetheless, the fiscal surplus which has been in place for many years has allowed the government to accumulate sizable fiscal reserves. The SAR government’s forward-looking plans - to establish a future fund and housing reserve, and implement a 10-year hospital development plan - will ensure long-term fiscal stability. Hence, the government will have stable repayment sources over the long run.
4. With a minimal debt burden, the local and foreign currency solvency of the SAR government will remain resilient. In 2016, the SAR government's debt burden rate was 4.9%, and it is expected to remain at an extremely low level of 5.0% and 5.1% in 2017 and 2018, respectively. The sizable fiscal reserves and excellent market financing capacity will continue to protect the local currency solvency of the SAR government. At the same time, the continuing current account surplus will underpin Hong Kong's international net debtor status. By the end of 2016, Hong Kong’s international reserves accounted for 122.2% of GDP, and that will also provide strong protection for the foreign currency solvency of the SAR government.
In the short term, continued weakness in the external trading environment and the slowdown in the Mainland's economy will negatively affect Hong Kong's economic growth; yet, under the SAR government's prudent governance, moderate economic growth will be sustained and financial risks will be contained. The sound fiscal conditions, a very low debt burden, and sufficient fiscal and international reserves will provide strong protection for the local and foreign currency solvency of the SAR government. Therefore, Dagong has decided to maintain a stable outlook for both the local and foreign currency credit ratings of Hong Kong for the next one to two years.