Moody's: Hong Kong's Aa1 Rating Reflects Strong Fundamentals

Moody's Investors Service says that Hong Kong's Aa1 government bond rating reflects the Special Administrative Region's (SAR) ongoing strong fundamentals.


These supports include its very high economic resiliency, very high government financial strength, and low susceptibility to event risk.


Economic resiliency is demonstrated by Hong Kong's strong economy, with very high per capita income and competitiveness in a number of areas, including financial services and international trade. In addition, Hong Kong's institutions are very strong in the areas of governance, rule of law, and transparency.


Moody's analysis was contained in its annual credit analysis of the territory, titled Hong Kong, and which is not a rating action but an update for investors. According to the report, the Hong Kong government's balance sheet is one of the strongest of Moody's-rated governments, with very small gross debt of around 4% of GDP and large fiscal reserves equivalent to about 36% of GDP. Adding to the government's financial strength are government-owned assets that could be privatized should the government choose to do so.


In terms of its growth prospects, Hong Kong's economy will face a more favorable environment in 2013 than it did last year, says the report. The US is now expected to grow around 2% this year, after having avoided the brunt of the so-called "fiscal cliff" earlier in 2013.


Meanwhile, China only experienced a soft-landing last year and its economy is now showing signs of faster growth.


And although the situation in Europe remains a risk, it is less important to Hong Kong than the world's two largest economies. As such, demand for Hong Kong's exports of goods and services will likely be more supportive in 2013.


The main constraint on Hong Kong's ratings has been event risk. In this context, Hong Kong has a "low" susceptibility to event risk, rather than "very low," largely because of its status as a region of China. The Basic Law, Hong Kong's constitutional document, is a law of the National People's Congress. In addition to the SAR's political status, its increasing economic and financial integration with the rest of China make it exposed to developments there.


Hong Kong is currently rated two notches above the Chinese government's rating, reflecting the strong institutions, the separate currency, and the high degree of autonomy enjoyed by the SAR.


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