Fiscal Reform Needed To Protect Hong Kong’s Credit Rating, Says S&P

by Mary Swire, Tax-News.com, Hong Kong

26 January 2005

International ratings agency Standard & Poor’s has warned Hong Kong that its credit rating will come under downward pressure unless the government finds more sustainable sources of tax revenues.

According to Paul Coughlin, managing director for corporate and government ratings in Asia, the Hong Kong economy remains “very vulnerable” to changes in sentiment, and government finances are likely to remain on a “rollercoaster ride” unless fundamental fiscal reforms are put in place.

"An important part of improving the infrastructure here in Hong Kong will be to improve the relative stability of government finances,” he observed in a Dow Jones report.

Thanks to strong economic growth and increased revenues from investments and land sales, many analysts are predicting that Hong Kong’s budget deficit, originally forecast to reach HK$46.2 billion this year, will be significantly reduced or even in surplus when the fiscal year ends in March.

However, Coughlin argued that the government finances will “plunge back into deficit in the next downturn” unless structural changes are put in place, although he added that he was “encouraged” by Financial Secretary Henry Tang’s support for a new sales tax.

Despite this warning, however, S&P said that a downgrade of Hong Kong’s A+ foreign currency rating and AA- local currency rating is unlikely to be on the immediate agenda.

“The short-term prospects are looking quite positive. In the medium term, the issue is to keep the ratings where they are, which is at a very high level," Coughlin observed.

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