Moody’s downgrades Hong Kong debt, citing government ‘inertia’

Moody’s downgraded Hong Kong‘s credit rating one notch to “Aa3” from “Aa2” on Monday, saying its view on the strength in the Chinese-ruled city’s institutions and governance was “lower than previously estimated.”

The agency cited a degree of “inertia” characterising the legislative and executive branches of government in a statement and moved its outlook to stable from negative.

“The absence of tangible plans to address either the political or economic and social concerns of the Hong Kong population that have come to the fore in the past nine months may reflect weaker inherent institutional capacity than Moody’s had previously assessed,” Moody’s said in a statement.

The ratings reflect the risk of a borrower – in this case, the Hong Kong government – defaulting on its debts. According to Moody’s, “obligations rated Aa are judged to be of high quality and are subject to very low credit risk”. Moody’s subdivides its broader classifications, so a borrower with an Aa3 rating is considered to be in a slightly worse financial position than one rated Aa2, Aa1 or those with Aaa ratings. 

The agency said there has been a lack of clarity from Hong Kong’s government on its response to the direct council elections late last year that saw pro-democracy candidates win by record numbers.

“Pressures on Hong Kong’s institutions undermine its credit profile directly,” Moody’s added.

In a statement on Tuesday, Hong Kong’s government said it strongly disagreed with Moody’s assessment and was “deeply disappointed” by the decision.

“Although Hong Kong has faced the most severe social unrest since its return to the Motherland in the past seven months or so, the [Hong Kong Special Administrative Region] Government, with the staunch support of the Central Government, has firmly upheld the ‘one country, two systems’ principle and handled the situation in accordance with the law to curb violence on its own to restore social order as soon as possible,” it said.

Shares in Hong Kong fell 1.54 percent on Tuesday morning, reflecting pessimism towards the local economy as tourism has declined following months of anti-government protests.

Moody’s said its stable outlook reflects Hong Kong’s superior fiscal strength and consistent macroeconomic stability.

The agency’s move follows an earlier downgrade by rival ratings provider Fitch in September to “AA” from “AA+”, with a negative outlook.

The downgrades are being made as social unrest grows in Hong Kong, with thousands gathering in a central park on Sunday calling for democratic reforms, leading to clashes with the police.

Protests escalated in June about a now-withdrawn bill which would have allowed extraditions to mainland China, where courts are controlled by the Communist Party. They have since broadened to several demands, including universal suffrage.

Moody’s called the response by Hong Kong’s government to political demands by parts of the population and concerns about living standards, housing costs and equality of economic opportunities to be “notably slow, tentative and inconclusive.”

The government said it was “proactively” engaging various groups of people through dialogue.

“The persistent social unrest reflects that there are deep-seated problems in society in Hong Kong, on which the Government will conduct an independent review soon,” the government statement said.