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| To paraphrase Sting, don't stand so close to Xi...or get a credit rating downgrade. |
Apparently, the rating agency Fitch does not think much of the "one country, two systems explanation for Hong Kong's existence alongside the PRC. If you are a Hong Kong civil servant, the logic Fitch used would be especially dismaying since their rationale for downgrading your special administrative region was "guilt by association". Was it a fair process through which HK was downgraded from AA to AA-? If you ask me, no. Here's what Fitch had to
say:
The anti-government protests, which grew increasingly violent in late 2019, appear to have temporarily receded amid the health crisis. At the same time, Hong Kong's deep-rooted socio-political cleavages remain unresolved, in Fitch's view. This injects lingering uncertainty into the business environment, and entrenches the risk of renewed bouts of public discontent, which could further tarnish international perceptions of the territory's governance, institutions, and political stability.
The downgrade also reflects Fitch's view that Hong Kong's gradual integration into China's (A+/Stable) national governance system and associated rise in economic, financial, and socio-political linkages with the mainland justify a closer alignment of their respective sovereign ratings. These established trends are exemplified by the central authorities taking a more vocal role in Hong Kong affairs than at any time since the 1997 handover.
This despite Fitch acknowledging Hong Kong's exemplary public financial management--protests and COVID-19 notwithstanding:
Public finances will remain a rating strength, despite the large budget deficit this year. Fitch's estimate for general government debt of 41% of GDP largely reflects outstanding liabilities used to manage the currency board, which are not fiscal in nature. Excluding these obligations, Hong Kong's government debt burden of about 3% of GDP compares favourably with the historical medians of 40% and 42% for 'AA' and 'A' rated peers, respectively. In addition, years of accumulated budget savings means the current mix of expansionary fiscal policies will be largely funded by fiscal reserves, rather than government debt issuance. Fitch projects the budget deficit will narrow to 2% of GDP in FY21, as one-off relief measures are unwound.
External finances are robust, despite a sobering hit to international trade volumes since early 2019, which will be exacerbated by the massive retrenchment in global activity currently underway. At the same time, Fitch believes these challenges are unlikely to jeopardise Hong Kong's external balance-sheet strengths. The territory is the second-largest net external creditor among Fitch-rated sovereigns (about 276% of GDP), and will likely remain so given our forecast for the current account to remain in modest surplus this year.
So it doesn't matter how well Hong Kong does
by itself for as long as the PRC exerts pressure on it? That doesn't seem fair. What parallel universe does Fitch occupy in which the United States--which will run at least a $4 trillion dollar budget deficit this year--
maintains a AAA rating, while Hong Kong which takes far more fiscally prudent measures gets knocked down to AA- from AA?
