Fitch Ratings downgraded Hong Kong’s long-term foreign currency issuer default rating from «AA+» to «AA», citing greater Chinese influence and ongoing unrest as major headwinds.
«Months of persistent conflict and violence are testing the perimeters and pliability of the «one country, two systems» framework that governs Hong Kong's relationship with the mainland, underscored by mainland officials taking a more public stance on Hong Kong affairs than at any time since the 1997 handover,» Fitch said in a release.
According to the ratings firm, growing economic, financial and socio-political links between Hong Kong and the mainland «implies continued integration into China’s national governance system, which will present greater institutional and regulatory challenges over time» Such developments, it added, are consistent with a narrowing of sovereign rating differential between Hong Kong and mainland China’s «A+».
In addition, «quality and effectiveness of Hong Kong's governance system and rule of law, and have called into question the stability and dynamism of its business environment».
Fitch also stated that it had a negative outlook on Hong Kong due to potential for renewed social unrest which could «further undermine confidence in public institutions, and tarnish perceptions of [the city's] governance, institutions, political stability, and business environment».
Good on Paper
Despite the political challenges, Fitch notes that sufficient financial buffers and other factors in place to withstand economic challenges such as a fiscal reserve equivalent to 40 percent of GDP and $441 billion of foreign reserve to defend the U.S. dollar peg.
Fitch also revised its Hong Kong GDP projections for 2019 to 0 percent (from 1.6 percent) and for 2020 to 1.2 percent (from 2 percent), driven not only by the aforementioned factors but also an ongoing U.S.-China trade war.
