S and P Upgrades Hong Kong's Credit Rating

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

31 July 2006

Hong Kong has received its second ratings upgrade in the space of a few days after Standard and Poors raised its long-term credit rating on Hong Kong Special Administrative Region to 'AA' from 'AA-'.

"The new rating mirrors the positive effect on Hong Kong arising from the improved credit fundamentals of the People's Republic of China (A/Stable/A-1), the ultimate sovereign," explained Standard & Poor's credit analyst Kim Eng Tan, of the Sovereigns' ratings group.

"The higher credit rating on China reduces the likelihood of potential negative developments in China spilling over to Hong Kong and adversely affecting its credit standing," expanded Kim.

Last Monday, Fitch Ratings revised the outlook on Hong Kong's long-term foreign currency Issuer Default Rating to Positive from Stable reflecting the SAR's strong external financial position and continued rejuvenation of its public finances.

However, S&P stated that Hong Kong's narrow tax base and reliance on volatile revenue streams such as land sales remains a "key credit weakness."

S&P welcomed Hong Kong's attempt to widen the tax base with its proposals to introduce a goods and services tax, although the new tax will not be implemented for at least three years after approval by the city's lawmakers.

The ratings agency also noted that as a special administrative region of China, Hong Kong's ratings continue to be constrained by those of the mainland. Nevertheless, according to S&P, 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.

"This shields Hong Kong from risks associated with weaker mainland institutions to a significant degree," S&P observed.

Further improvements in China's credit strength, coupled with the implementation of measures to increase the stability of public finance, would have a positive impact on the credit rating on Hong Kong. Conversely, a renewed deterioration in the fiscal situation could weaken the credit rating on Hong Kong, S&P stated.

Welcoming the upgrade, Hong Kong's Financial Secretary Henry Tang said the report confirms that Hong Kong's improved fiscal position and sound economic fundamentals deserve a much higher rating.

"It is also recognition of the continued strength of China's economic performance and the overall strengthening of its creditworthiness. Hong Kong will continue to capitalise on the opportunities arising from China's rapid growth," he noted.

Standard & Poor's last raised Hong Kong's foreign and local currency rating outlooks to "positive" from "stable" in April. It last upgraded Hong Kong's long-term foreign currency rating to "AA-/stable" from "A+/positive" last July.

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