Moody’s downgrades Hong Kong’s credit rating, citing concerns about the government’s inability to produce a tangible plan to address issues highlighted by ongoing political unrest.

The major rating agency lowered the Hong Kong government’s long-term issuer and senior unsecured rating from Aa2 to Aa3. According to Moody’s, unrest in the past nine months has exposed not only weakness in the administration’s ability to govern but also the autonomy of institutions in the city. 

«The downgrade principally reflects Moody's view that Hong Kong's institutions and governance strength is lower than previously estimated,» Moody’s said in a statement.

Moody’s joins rival Fitch which also issued a rating downgrade for Hong Kong in September from AA+ to AA. According to Fitch, continued integration warrants a narrowing of the difference between Hong Kong and mainland China’s A+ rating alongside newly casted doubts about the «quality and effectiveness of Hong Kong’s governance system and rule of law».

Doubts About «Two Systems»

In addition to internal challenges, Moody’s also highlighted worries about external risks from other governments being exacerbated by threats to the «One country, Two systems» policy that has been the bedrock for Hong Kong’s success as a bridge to global markets. The statement cited the passage of the «Hong Kong Human Rights and Democracy Act of 2019» as the most notable example of headwinds abroad. 

«[A]ctual or perceived changes in the autonomy of Hong Kong's institutions raise the risk that actions by foreign governments negatively impact its competitiveness and economic strength and hinder the effectiveness of policymaking still further,» Moody’s said.

Outlook Upgraded

In contrast, Hong Kong’s fiscal strength and macroeconomic stability led Moody’s to improve its outlook from «negative» to «stable» after a downgrade in September. According to the firm, the city is expected to demonstrate continued resilience even through periods of weak or negative growth. 

«Moreover, ample foreign exchange reserves contribute to macroeconomic stability for a small, open economy and large financial center and support the credibility and viability of the currency peg,» the statement added.

«In Hong Kong's past, and during the current recession and period of political, social and economic uncertainty, the peg's credibility has remained strong. This track record supports Moody's view that the [Hong Kong Monetary Authority] will maintain macro-economic stability.»