Occupy Central Protests Not Significant Enough to Undermine Hong Kong's Strong Buffers

The ongoing confrontation between the protestors and the Hong Kong government are not significant enough to undermine the Special Administrative Region’s (SAR) strong financial, institutional and economic environment.

Moody's Investors Service sayd the government of Hong Kong’s Aa1 rating and stable outlook remain supported by such buffers as the Occupy Central protests continue into a second week.

"Confidence remains in the SAR’s exchange rate peg, and the Hong Kong Monetary Authority has stated that operations remain normal in the payment and settlement systems, interbank markets and core functions of the banking system," says Tom Byrne, Senior Vice President/ Manager, Asia-Pacific, Middle East, Sovereign Risk Group, Moody’s Investors Service.

Byrne adds that Hong Kong’s fundamental buffers are substantial, explaining that the government has built up its fiscal reserves to a very high level, equivalent to 36% of GDP. These reserves far exceed the very small level of government debt.

Hong Kong also has the largest net international investment positions in the world, with systemic foreign assets abroad exceeding foreign liabilities by an amount equivalent to 280% of GDP at the end of 2013. Thus, even some reversal of capital flows would be easily accommodated.

"While the impact of the demonstrations will likely have negative consequences on Hong Kong’s near-term economic performance, the key pillars of the SAR’s economy that provide more than half of its output -- trade and logistics, financial, and professional services -- do not seem to be directly affected by the political disorder. Moreover, its economy has proved resilient to previous downturns, such as during the 2008-09 global financial crisis and the SARS epidemic," says Byrne.

Byrne, however, warns that prolonged, disruptive demonstrations or a violent confrontation that lead to an unbridgeable divide between the government and the pro-democracy activists would be credit negative, if such a situation were to hamper Hong Kong’s ability to function as a global financial center or to undermine the SAR’s “one country, two-systems” political and economic constitutional arrangement with the central government in Beijing.

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