Moody's downgrades Hong Kong rating outlook to negative

Ratings agency Moody's downgraded the outlook on Hong Kong's credit rating to negative from stable on Wednesday, following a similar change for China the day before.

The city's economy was buoyed by China's post-pandemic reopening but recovery has slowed in the latter half of the year, with the government last month revising full-year growth estimates down to 3.2 percent.

Moody's said the "principal driver" of Hong Kong's negative rating outlook was the "tight linkage between the credit profiles" of the finance hub and China.

"The change in Hong Kong's rating outlook reflects Moody's assessment of tight political, institutional, economic and financial linkages between Hong Kong and the mainland," the agency said in a statement.

This is the first time Hong Kong has lost its "stable" rating outlook since January 2020.

The agency said China's downside risks would translate to risks for Hong Kong's own creditworthiness, adding that changes in "institutional and political linkages" were a key element of the city's risks.

"Following signs of reduced autonomy of Hong Kong's political and judiciary institutions, notably with the imposition of a National Security Law in 2020 and changes to Hong Kong's electoral system, Moody's expects further erosion of the (city's) autonomy of political, institutional and economic decisions to continue incrementally," it said.

"This ongoing process is currently reflected in Moody's assessment of the quality of Hong Kong's executive and legislative institutions."

Beijing imposed a sweeping national security law in Hong Kong after the former British colony saw huge and at times violent democracy protests in 2019.

Authorities have since ousted opposition figures from the legislature and set up a "patriots-only" electoral system, which extends down to the local level.

Moody's also said the weakening trend growth in mainland China would affect Hong Kong's economy, including "through more slowly expanding opportunities for Hong Kong as the key regional economic and financial hub".

"In turn, weaker growth in Hong Kong could erode the government's fiscal buffers, as support to the economy broadly leads to a rise in public spending," it added.

The SAR government said it disagreed with the outlook downgrade on the grounds of the tight linkage of credit profiles with the mainland and the potential spillovers from the developments on the mainland. 

"Hong Kong's deepening and expanding economic and financial ties with the Mainland should not be a rating constraint," according to the statement released Wednesday night. "On the contrary, these ties are a source of strength for Hong Kong's long-term development." 

The government also stated that Moody's made "unfounded comments" on the city's high-degree of autonomy, its political and judicial institutions, the implementation of the National Security Law and changes to the electoral system.

"The strengths of Hong Kong have withstood different tests over time, and will continue to do so in the future," the statement added.

Moody's downgraded its outlook for China's credit rating to negative a day earlier and citing rising debt in the world's second-largest economy and concerns over its battered property sector.

Beijing's finance ministry said in response it was "disappointed with Moody's decision" and that the agency's concerns about growth prospects and fiscal sustainability were "unnecessary".

(Staff reporter and AFP)
(Updated at 8:18pm)