Hong Kong’s credit standing holds firm with ‘AA-‘ rating from Fitch, eyeing stable outlook

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22nd February 2024 – (Hong Kong) Fitch Ratings, the international credit rating agency reaffirmed Hong Kong’s long-term foreign-currency issuer default rating (IDR) at ‘AA-‘, maintaining a stable outlook. This decision reflects Hong Kong’s consistent fiscal discipline, robust external finances, and high per capita income despite the challenges faced in recent years.

Hong Kong’s financial resilience is supported by substantial fiscal reserves, with an external position that is notably strong among global economies. Despite the expected delay in returning to a balanced budget, this does not immediately threaten the territory’s credit standing. The alignment of Hong Kong’s governance with mainland China since 2019 has also been factored into the rating.

The rebound in Hong Kong’s economy is set to continue modestly, with growth projected at 3.0% in 2024, slightly down from 3.2% in the previous year. This forecast hinges on the revival of tourism, especially with the recent uptick in visitors from mainland China during significant festive periods and efforts to enhance the city’s appeal as a tourist destination. However, the export sector is expected to grapple with sluggish global demand despite the anticipated easing of policy rates.

While the territory’s GDP is on track to surpass its 2018 level by the end of 2024, signs of concern loom over the property market and financial conditions, which could dampen domestic demand. Moreover, a potential global downturn, especially concerning China’s growth, along with sustained high-interest rates and ongoing geopolitical tensions, poses additional risks.

The government’s budget deficit is predicted to narrow in the 2024 fiscal year, reflecting a controlled unwinding of pandemic-era financial support measures. Nonetheless, achieving a balanced budget remains a distant goal. Hong Kong’s adherence to the Basic Law, particularly Article 107, ensures a commitment to fiscal prudence over time. The territory’s fiscal reserves and low debt levels continue to be key strengths, providing a buffer against economic shocks.

With one of the highest net external creditor positions, Hong Kong’s financial sector remains robust, supported by a history of current account surpluses. Challenges persist in revamping Hong Kong’s competitiveness and business dynamism, particularly following adjustments in governance and pandemic-related restrictions.

The Hong Kong dollar benefits from a stable linked exchange rate system with the U.S. dollar, backed by substantial foreign exchange reserves. Inflation is expected to remain moderate, with the banking sector continuing to show strong funding and liquidity profiles.

Hong Kong’s governance has been a pillar of strength, with high World Bank Governance Indicator rankings. However, the social unrest of 2019 has tested its political stability. The territory’s ESG scores reflect the significance of governance in its credit rating, with particular emphasis on political stability, rule of law, and control of corruption.

A downgrade could result from a decline in Hong Kong’s strategic financial and commercial position or adverse developments in mainland China’s credit profile. Conversely, positive structural reforms and an improvement in China’s sovereign profile could lead to an upgrade.

Fitch’s proprietary Sovereign Rating Model (SRM) and Qualitative Overlay (QO) informed the affirmation of Hong Kong’s rating. The country ceiling remains at ‘AAA’, indicating a strong likelihood that Hong Kong will meet its foreign obligations.