2019.09.0601:13:00UTC+00Fitch Downgrades Hong Kong's Sovereign Ratings

Fitch Ratings downgraded Hong Kong's sovereign ratings as the agency sees narrowing of rating differentials between Hong Kong and mainland China.

The credit ratings were lowered to 'AA' from 'AA+', with 'negative' outlook.

The rating agency observed that ongoing demonstrations have done long-lasting damage to international perceptions about the effectiveness of Hong Kong's governance system and rule of law.

"Fitch expects the "one country, two systems" framework to remain intact, but the gradual rise in Hong Kong's economic, financial, and socio-political linkages with the mainland implies its continued integration into China's national governance system, which will present greater institutional and regulatory challenges over time," the agency said.

Fitch said these developments are consistent with a narrowing of the sovereign rating differential between Hong Kong and mainland China (A+/Stable).

Moreover, the 'negative' outlook reflects the assessment that even with concessions to some protestor demands, a degree of public discontent is likely to persist. The potential for renewed eruptions of social unrest could further undermine confidence in public institutions, and further tarnish perceptions of Hong Kong's governance.

Fitch forecasts Hong Kong's economic growth to remain flat in 2019, implying an outright contraction during the second half of this year, and 1.2 percent in 2020. The budget surplus is forecast to narrow to roughly zero in 2019. Nonetheless, Hong Kong's considerable financial buffers are set to remain intact.

Hong Kong authorities have ample resources to maintain the Hong Kong dollar peg to the US dollar. The economy has a large fiscal reserve equivalent to 40 percent of GDP.

Other factors that underpin Hong Kong's credit profile are its strong record of public-finance management, high income levels, and its resilient and flexible economy, Fitch noted.