RPT-Fitch Affirms Hong Kong at 'AA+'; Stable Outlook
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Sept 19 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed both Hong Kong's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'AA+'. The Outlook is Stable. The agency also affirmed the Short-Term Foreign-Currency IDR at 'F1+' and Country Ceiling at 'AAA'.
KEY RATING DRIVERS
The affirmation of the ratings reflects the following factors:
- Hong Kong has a resilient and flexible economy and very strong public and external finances. These factors, coupled with the periodic implementation of macro-prudential measures, help mitigate the risks associated with increasing financial exposure to China and high domestic real-estate prices.
- Hong Kong has not followed the recent slowdown in China's economy, with real GDP growing 3.3% yoy in Q213 (vs 2.9% in Q113). Nonetheless, Hong Kong's resilience could be tested in the face of expected monetary tightening by the US Federal Reserve just as growth in its main trade and financial partner, China, slows. However, Hong Kong's supply-side flexibility is an important buffer against shocks.
- Hong Kong's public finances remain among the strongest in the high-grade sovereign universe as it recorded its eighth consecutive annual budget surplus of 3.1% of GDP in the fiscal year ending March 2013. As a result, Hong Kong's fiscal reserves rose to 35.6% of GDP (or 23 months of government expenditure) at end-March 2013, which in turn continues to support the viability of the Linked Exchange Rate System.
- Hong Kong has strong external finances. Its net external creditor position stood at 281% of GDP in 2012, well above both the 'AA' and 'AAA' peer rating group medians. This provides the sovereign with a buffer during periods of elevated global risk aversion.
- In Fitch's assessment, risks related to China's economy and financial system weigh on Hong Kong's ratings in the context of the deepening economic and financial integration between the two. Fitch considers the Hong Kong banking sector's rising direct and indirect exposure to China to be its single biggest risk, ahead of risks associated with the domestic property market. Gross exposure to Mainland China stood at 28.2% of system-wide assets at end-March 2013. Risks attached to China-related lending stem from rapid opportunistic growth and strong competition, and they also include lower transparency and corporate governance standards and cross-border collateral enforceability.
- The strong pace of house-price growth highlights Hong Kong is still facing macro-prudential risks. However, there are important mitigating factors in the stand-alone strength of the banks as well as structural factors behind high house prices such as non-resident demand and limited supply. Moreover, Hong Kong's sovereign credit profile has historically demonstrated a high degree of resilience to volatility in real-estate prices.
The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently well-balanced. Consequently, Fitch's sensitivity analysis does not currently anticipate developments with a high likelihood of leading to a rating change.
The main factors that individually, or collectively, could trigger positive rating action include:
- A sustained easing in China's financial-sector risks, in particular avoiding a hard landing or severe banking sector stress;
- The successful rebalancing of China's economy from being investment-led to more consumption driven, implying more sustainable long-term growth prospects. The main factors that individually, or collectively, could trigger negative rating action include:
- A severe economic shock from China and/or sharp, sustained deterioration in economic growth leading to significantly higher unemployment or broader economic and financial instability;
- A sharp, structural decline in Hong Kong's fiscal position, which leads to a sustained erosion in fiscal reserves;
- A sharp deterioration in Hong Kong banking sector's funding position or asset quality.
- The political environment remains stable and Hong Kong's investment/business climate remains attractive.
- Hong Kong does not experience a balance of payments crisis, which results in a move away from the Hong Kong dollar's peg to the US dollar.
- There will be no severe disruption to global economic and financial stability that could lead to a sudden stop in capital flows.
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