S&P: Hong Kong Ratings Affirmed At 'AAA/A-1+' And 'cnAAA/cnA-1+'; Outlook Remains Negative
The ratings on Hong Kong also reflect above-average economic growth prospects for a high-income economy, healthy fiscal performance, sizable fiscal reserves, a strong external position, and the credibility of monetary policy, despite the inherent limitations of a pegged exchange rate regime in conducting independent monetary policy. That said, we do not believe Hong Kong's credit standing can be completely disconnected from that of the mainland, given financial and economic linkages, and the ultimate sovereign authority of China.
We estimate Hong Kong's 2016 GDP per capita to be about US$44,300. We believe Hong Kong's economy is likely to grow faster than the average of high-income economies over the next three years. This forecast assumes resilient local demand, a gradual recovery in advanced economies, and China maintaining economic growth close to 6% annually. In particular, the SAR's role in facilitating China's economic and financial integration with the rest of the world should continue to support Hong Kong's financial sector, an important growth engine of its economy.
Hong Kong's sizable and liquid fiscal reserves anchor its creditworthiness. The territory's conservative fiscal policy, significant expenditure flexibility, and generally solid economic growth have led to consistent fiscal surpluses since 2005. As a result, we project that the government will hold liquid assets amounting to about one-third of GDP at the end of 2016. We expect Hong Kong to maintain a prudent fiscal policy, given its long-term fiscal planning.
We rank Hong Kong banking system risk as '2' in our Banking Industry Country Risk Assessment (BICRA), with '1' being the strongest system and '10' the weakest. However, the sheer scale of the system, with total assets of approximately 8x Hong Kong's GDP as of year-end 2015, suggests that a downturn in the economies of Greater China could quickly affect economic conditions in the SAR. For this reason, the financial system is a source of contingent liability to the government.
Hong Kong's strong external creditor position stems from its sustained current account surpluses. We project Hong Kong's 2016 public and financial sectors' external assets net of total external debt at approximately 60% of its current account receipts (CARs). We expect the broader measure of Hong Kong's entire international investment position to be 115%-140% of its CARs in the next four years. In addition, the Hong Kong dollar is actively traded globally. These strengths and the Hong Kong Monetary Authority's (HKMA) prudent regulations help maintain confidence in the banking sector and mitigates the risks of large short-term external debts typical of a global financial center.
We believe Hong Kong's long-established Linked Exchange Rate System (LERS) has facilitated its monetary and financial stability. While the peg of the Hong Kong dollar to the U. S. dollar under the LERS means that Hong Kong's short-term interest rate largely follows that of the U. S., the HKMA has been able to use regulatory and supervisory measures to lessen the impact of sharp economic and financial fluctuations. We expect the HKMA to maintain a pegged exchange rate regime and safeguard financial stability with regulatory measures.
OUTLOOKThe negative outlook on the long-term rating on Hong Kong mirrors that on our long-term rating on China. In the absence of a further strengthening of the independence of the SAR's already resilient and effective institutions, we would likely lower our rating on Hong Kong by one notch if we lowered our rating on China. On our current expectations of the trends in economic and financial risks in China, we could lower the rating on China this year or next.
In addition, we might lower our rating on Hong Kong without a downgrade of China, if Hong Kong's political polarization worsens to a point where it compromises policymaking and the business environment. In such a scenario--which is not our base case--we would expect a gradual deterioration of the SAR's above-average growth, healthy fiscal reserves, and strong external position.
We could revise the outlook on Hong Kong back to stable if we took the same action on China, all other things being equal.