Standard & Poor's Ratings Services has revised the outlook on Hong Kong Special Administrative Region to positive from stable, reflecting the territory's improved fiscal position and bright economic prospects.
"The outlook revision reflects the continuing improvements in Hong Kong's fiscal situation, particularly the discipline shown by the administration in controlling expenditure. This has reinforced the already strong fiscal flexibility of the Hong Kong government," explained Standard & Poor's credit analyst Kim Eng Tan.
S&P noted that consecutive declines in government expenditure over the past two fiscal years underline the administration's commitment to fiscal discipline.
Higher revenue growth as a result of economic growth has also driven the budget into a modest surplus equal to about 0.5% of GDP in the fiscal year which ended March 31, 2006.
S&P predicted that the surplus is likely to be maintained in the coming years. However, the ratings agency went on to warn that Hong Kong's narrow tax base and its reliance on volatile sources of revenue such as asset sales, land sales, and investment income, remains the "Achilles' heel" of its public finances.
Nonethless, the government's "exceptional" financial position, strong economic fundamentals and a large net external creditor position currently underpin the ratings on Hong Kong, S&P stated.
The report noted that as a special administrative region (SAR) of China, Hong Kong's ratings are constrained by those of the Mainland, but Hong Kong enjoys higher ratings than China because of the large degree of autonomy in domestic policy, international economic relations, and external affairs that is enshrined in the Basic Law.
"The ratings on Hong Kong could be raised in line with an upgrade of the ratings on China, provided the trend of fiscal prudence persists," the report said.
"Conversely, the positive outlook could be adversely affected by deterioration of the fiscal balance triggered by a sustained economic slowdown," it concluded.
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