Hong Kong ratings affirmed at 'AA+/A-1+'; Outlook Stable

September 29, 2021

SINGAPORE -- S&P Global Ratings has affirmed its 'AA+' long-term and 'A-1+' short-term issuer credit ratings on Hong Kong. The outlook remains stable, and the transfer and convertibility assessment is unchanged at 'AAA'.

S&P says the stable outlook reflects its expectation that Hong Kong's economic recovery over the next 12-24 months will be sustained, while recent legislative changes, including electoral reform, will not fundamentally affect the Special Administrative Region (SAR) government's autonomy in setting economic policies, as laid out in the Basic Law.

But S&P also says it could lower the ratings due to a number of factors, such as events that affect Hong Kong's economic stability or policy predictability.

"We could also consider a downgrade if the government depletes fiscal reserves at a much faster pace than we currently anticipate."

S&P said it could consider an upgrade if Hong Kong's policy environment improved materially, enhancing social and political stability, strengthening public finances and raising the SAR's long-term economic prospects.

S&P said Hong Kong's creditworthiness reflected a record of policymaking that had contributed to a high per capita income, robust fiscal buffers, and -- until recently --consistently healthy fiscal performance.

Hong Kong's strong external balance sheet, low debt level, and credible monetary institutions further supported the Government's credit standing despite the constraints of a linked exchange rate regime.

"These strengths are balanced against our view of the limitations in Hong Kong institutions' ability to respond to pressing social demands over the years, such as housing affordability and political reform, that could affect social cohesiveness and confidence in its institutional strength.

S&P said Hong Kong's economy was on track for a robust recovery this year, with COVID-19 cases generally well-contained.

Following six consecutive quarters of contraction, Hong Kong's economy has bottomed out and is strongly recovering this year," it said.

"Implementation of the National Security Law and changes to the electoral system will likely reduce the likelihood of street protests and legislative gridlock.

"However, there is lingering uncertainty over the scope of these legislative changes and their effectiveness in addressing underlying social issues."

Hong Kong's real GDP grew by 7.8% in the first half of 2021 compared with the same period last year, rebounding from a 6.1% contraction during 2020.

Exports increased 30% year-on-year in the first half, benefitting from a strong recovery in end-demand markets and China.

"Unlike many economies in the region hit by the delta variant, Hong Kong has greatly limited the local community spread of COVID-19, effectively reducing the need for social mobility restrictions that continue to be imposed in most neighbouring economies," S&P said.

"This provided some respite to domestic economic activities, which had been constricted by large-scale street protests in 2019 and lockdowns in 2020.

"However, the recovery remains uneven across sectors, as tourism arrivals remain far below 2019 levels due to strict border controls.

"Despite Hong Kong being one of the first governments to procure vaccines, the vaccination rate is still below the level deemed necessary for widespread protection against serious illness. This will likely delay the timeline for a relaxation of border controls that may be needed for a more broad-based recovery."

S&P forecast Hong Kong's economy to grow 6.5% in real terms this year before moderating to 2.5% in 2022. This translates to GDP per capita of US$49,800 in 2021 and trend growth, as measured on a 10-year weighted average basis, at 1.2%. "This has improved from our previous estimate of 0.7%."

On the upside, S&P said, new connection schemes between the financial markets in Hong Kong and mainland China, as well as developments in the Greater Bay Area (Macao, Hong Kong and southern China), were likely to boost services sector growth.

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