Hong Kong's Aa1 Stays Supported by Strong Fiscal and External Positions, Says Moody's

Moody's Investors Service says Hong Kong's Aa1 government bond rating remains supported by the Special Administrative Region's (SAR) very strong fiscal position as well as robust external position.


Together, these provide substantial buffers against potential shocks coming from China (Aa3 stable) or elsewhere.


These buffers allow Hong Kong's rating to be higher than China's despite its political status as a special administrative region and the increasing economic and financial ties to the rest of China.


Hong Kong's very high economic strength assessment -- which strongly support its rating -- is based on its high per capita income, its relative economic diversity for an economy of its size, and its resiliency to external shocks.


The SAR's economy -- at $274 billion in 2013 -- is slightly larger than the median for Moody's Aa-rated sovereigns.


Meanwhile, its level of wealth is also higher than most of its peers, including some large industrialized economies.


In terms of growth, Hong Kong has experienced a similar rate of expansion relative to its counterparts, averaging 2.6% annual growth between 2008 and 2013.


Hong Kong's very high institutional strength is another factor supporting its high rating and one of the reasons its rating is higher than China's.


Although part of China, Hong Kong has separate legal, regulatory, fiscal, monetary, and trade regimes. The SAR is regularly ranked at or near the top of various international surveys on governance, rule of law, and transparency.


Strong economic and monetary policy regimes are also evidence of its very high institutional strength.


Hong Kong's fiscal strength is assessed as very high due to its strong fiscal performance, low debt levels and large assets that make the SAR a net creditor.


This is reflected in the government's strong balance sheet, as fiscal reserves have continued to grow considerably, reaching HKD746 billion at the end of the 2013-14 fiscal year, equivalent to 21 months of government expenditure or 35% of GDP.


In terms of Hong Kong's susceptibility to event risk, Moody's believes the SAR faces some risks from its increasing reliance on trade and financial links with China.


The report says that the banking system of Hong Kong is one of the strongest financial systems in the world with a Baseline Credit Assessment of a1, which currently supports our view of very low risk for the sovereign stemming from the banking sector.


The strength of the banking system was demonstrated during 2008-09, when despite large capital outflows, there was no financial crisis in Hong Kong.


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