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Analyst
Mingyan Du
dumingyan@dagongcredit.com
Sovereign Credit Rating
Local
currency/outlook AAA/stable
Foreign currency/outlook AAA/stable
Rating time October 2010
Rationale
Dagong assigns “AAA” on both local currency and
foreign currency long term sovereign credit ratings for Hong Kong Special
Administrative Region (“Hong Kong”)，which is based on such factors as the
increasingly reinforcing governance capacity, strong economic strength, fiscal
strength and foreign currency strength, sound and advanced financial system.
Hong Kong government holds tiny and gradually decreasing debt, so it has no
need for financing generally. Long-term fiscal surplus makes Hong Kong
government accumulate immense fiscal reserves. By the end of 2009, the debt
outstanding of Hong Kong government decreased from 1.5% of GDP to 1.0%, among
which, foreign currency denominated debt shrank from 0.9% of GDP in 2005 to
0.7%. For the aim of consolidating economic recovery and elevating
competitiveness further, Hong Kong government continues its moderate
expansionary fiscal policy in 2010-11 fiscal year. We estimate it would be
possible to emerge a fiscal deficit of about 1.0% of GDP, which can be covered
by the fiscal reserves easily.
Hong Kong government holds the super capability of debt redemption. The Main
reasons are as follows:
On the basis of rule of law and excellent executive branch, through gradual
adaptation to the new political regime after the sovereign resumption by the
People’s Republic of China, Hong Kong government has primarily formed effective
mechanism to operate under the Basic Law. The methods for selecting the chief
executive and for forming the legislative council in 2012 will enlarge greatly
the supporting foundation to Hong Kong government.
Economic structure has changed towards high-level service industries
successfully. The economic strategy with the high value-added services as its
major development orientation takes full account of its own characteristics in
the economic integration with mainland China, which enables the economy to have
the potential of sustained growth. Recently the recovery momentum is rather
opportunistic due to the high-speed growth in mainland China and other Asian
countries. We forecast the economic growth rate will reach 5.8% in 2010.
The financial system is quite advanced and sound. However, under the
circumstances of low interest rate for a long time, precautions should be taken
against a possibly new round of asset price bubble .
Pursuing the expenditure limitation policy historically enables Hong Kong
government to accumulate ample fiscal reserves. At the same time, three other
elements also assure Hong Kong’s foreign currency strength forcefully, which are
continued current account surplus, high-level foreign reserves and net
international financial assets.
Outlook
The discussion about election reform has clamed down because the methods have
been adopted by the Standing Committee of National People’s Congress of the
People’s Republic of China, which enables the government to pay more attention
to the question of economic development and improving people’s livelihood. The
enhanced cooperation between Hong Kong and Guangdong Province has integrated the
economy of Hong Kong with that of the Pearl River Delta. During this process,
Hong Kong chooses the high-end service industries as main direction in order to
shape benign complementary economic structure with Guangdong and other provinces
along the south-east coast of China. China’s strong economic growth trend and
the bright prospective of becoming RMB offshore center provide Hong Kong’s
financial system with continuous power. Although the fiscal reserves will be
reduced a little because of the possible fiscal deficits in the coming 2-3
years, there will still be the effective security to fiscal strength.
Furthermore, the ample foreign reserves and net international financial assets
will be maintained. Therefore, Dagong keeps the stable outlook for Hong Kong’s
local and foreign currency sovereign credit rating in the next 1-2
years.
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