Recurrence of Large-Scale Demonstrations Could Eventually Affect Hong Kong's Economic Prospects

While demonstrations may pose some downside risk to Hong Kong's growth for 2014, it is unlikely to present a rating risk, says Fitch Ratings.

However, increasingly evident internal political divisions could have longer-term consequences for Hong Kong's credit profile, if tensions were to worsen over time, says the agency.

The protests have not had a significant impact on the key positive factors underpinning Hong Kong's ratings.

Fitch affirmed Hong Kong's AA+/Stable rating in September, anticipating that protests were imminent but would not be sufficiently disruptive to alter our fundamental sovereign credit view.

The territory continues to benefit from exceptionally strong public and external finances, including fiscal reserves amounting to 35% of GDP and a large net international investment surplus equivalent to 280% of GDP.

Hong Kong's flexible economy and consistent fiscal and currency policy frameworks also remain intact, and are unlikely to change in the short term.

However, while deepening trade and financial linkages with China are positive for Hong Kong in many ways, it also exposes Hong Kong to China "country risk" to a rising degree, says Fitch.

More broadly, the territory faces the prospect of a slowdown in the mainland while importing tighter monetary policy from the US via its currency board.

"However, the buffers and resources available to Hong Kong to meet these challenges remain considerable, and continue to underpin very high sovereign credit ratings," says Fitch.

The key question related to the demonstrations for Hong Kong's credit profile, is less to do with the immediate economic impact from the protests, and more with whether social and political tensions can be managed or worsen over time.

A deepening of social divisions that lead to a recurrence of large-scale demonstrations could eventually have a negative effect on foreign and domestic business and investor confidence in Hong Kong as a place to do business. This could eventually affect the territory's economic prospects.

Hong Kong's ratings benefit from the strength of its core public institutions and policy-making capacity. However, a weakened degree of basic consent among the community, if this happens, could impair the government's ability to draw up and implement policy, says Fitch.




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