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| To paraphrase Sting, don't stand so close to Xi...or get a credit rating downgrade. |
Apparently, the rating agency Fitch does not think much of the "one country, two systems explanation for Hong Kong's existence alongside the PRC. If you are a Hong Kong civil servant, the logic Fitch used would be especially dismaying since their rationale for downgrading your special administrative region was "guilt by association". Was it a fair process through which HK was downgraded from AA to AA-? If you ask me, no. Here's what Fitch had to
say:
The anti-government protests, which grew increasingly violent in late
2019, appear to have temporarily receded amid the health crisis. At the
same time, Hong Kong's deep-rooted socio-political cleavages remain
unresolved, in Fitch's view. This injects lingering uncertainty into the
business environment, and entrenches the risk of renewed bouts of
public discontent, which could further tarnish international perceptions
of the territory's governance, institutions, and political stability.
The
downgrade also reflects Fitch's view that Hong Kong's gradual
integration into China's (A+/Stable) national governance system and
associated rise in economic, financial, and socio-political linkages
with the mainland justify a closer alignment of their respective
sovereign ratings. These established trends are exemplified by the
central authorities taking a more vocal role in Hong Kong affairs than
at any time since the 1997 handover.
This despite Fitch acknowledging Hong Kong's exemplary public financial management--protests and COVID-19 notwithstanding:
Public finances will remain a rating strength, despite the large
budget deficit this year. Fitch's estimate for general government debt
of 41% of GDP largely reflects outstanding liabilities used to manage
the currency board, which are not fiscal in nature. Excluding these
obligations, Hong Kong's government debt burden of about 3% of GDP
compares favourably with the historical medians of 40% and 42% for 'AA'
and 'A' rated peers, respectively. In addition, years of accumulated
budget savings means the current mix of expansionary fiscal policies
will be largely funded by fiscal reserves, rather than government debt
issuance. Fitch projects the budget deficit will narrow to 2% of GDP in
FY21, as one-off relief measures are unwound.
External
finances are robust, despite a sobering hit to international trade
volumes since early 2019, which will be exacerbated by the massive
retrenchment in global activity currently underway. At the same time,
Fitch believes these challenges are unlikely to jeopardise Hong Kong's
external balance-sheet strengths. The territory is the second-largest
net external creditor among Fitch-rated sovereigns (about 276% of GDP),
and will likely remain so given our forecast for the current account to
remain in modest surplus this year.
So it doesn't matter how well Hong Kong does
by itself for as long as the PRC exerts pressure on it? That doesn't seem fair. What parallel universe does Fitch occupy in which the United States--which will run at least a $4 trillion dollar budget deficit [try this novelty
source] this year--
maintains an AAA rating, while Hong Kong which takes far more fiscally prudent measures gets knocked down to AA- from AA?
