Hong Kong/China (21/1)  —  Moody’s Investors Service has downgraded Hong Kong’s rating, citing concerns over the government’s lack of tangible plans to resolve the political and economic issues arising from the more than seven months of protests, dealing another blow to the city’s reputation as a business hub.

The rating agency lowered the long-term issuer and senior unsecured ratings of the Hong Kong government by one notch to Aa3 from Aa2, becoming the second agency to lower the city’s credit rating. In September, Fitch Ratings cut Hong Kong’s sovereign rating by one notch, to AA from AA+.

Some of the assumptions underpinning [Hong Kong’s] rating are currently being tested, including the effectiveness of the territory’s governance and its rule of law Fitch

“The downgrade principally reflects Moody’s view that Hong Kong’s institutions and governance strength is lower than previously estimated,” Marie Diron, managing director of Moody’s sovereign risk group, and Martin Petch, vice-president and senior credit officer of sovereign risk group, said in a statement on Monday night.

Moody’s said the absence of tangible plans by the government to address the issues highlighted by the social unrest may reflect weaker inherent institutional capacity than it had previously assessed.

The rating agency added that despite the “one country, two systems” policy underpinning Hong Kong’s autonomy for the past two decades, the lack of clarity on how the government is tackling the political and economic issues as highlighted by the protests also suggests more significant constraints on the autonomy of the city’s institutions than previously thought.

image: via SCMP
Fitch too had raised doubts about the city’s governance under the “one country, two systems” principle amid continuing protests, an assessment stoutly rejected by the city’s leader Carrie Lam Cheng Yuet-ngor.
“Changes in the autonomy of Hong Kong’s institutions raise the risk that actions by foreign governments negatively impact its competitiveness and economic strength and hinder the effectiveness of policy making still further,” Moody’s said, citing the passage of the Hong Kong Human Rights and Democracy Act of 2019 by the US Congress last year as an example.
Backed by the act, which has been signed by US President Donald Trump into law, the US State Department will conduct an annual review to determine whether changes in the Special Administrative Region’s political status justify changing the nature of US trade policy with Hong Kong.

The Hong Kong government said that it expects the economy to shrink 1.3 per cent in 2019, after the city fell into a recession in the third quarter, as tourism and retail sales took a hit from the protests, which initially had been triggered by the now-withdrawn extradition bill.

While several fiscal stimulus packages have been announced since August, Moody’s said it does not expect the measures planned so far will effectively improve housing affordability or start addressing demands for a more equal distribution of income and wealth.

In December, the government had announced a series of relief measures worth about HK$4 billion, targeting primarily small firms to help them cope with the recession. Those measures are on top of more than HK$21 billion in sweeteners the government has unveiled since the third quarter of 2019.