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            october 15, 2019

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Moody's downgrades Hong Kong outlook to 'negative' as protests go on


Credit rating agency Moody's has downgraded its outlook on Hong Kong's rating to negative from stable, reflecting what it called the rising risk of "an erosion in the strength of Hong Kong's institutions" amid the city's ongoing protests.
The move follows Fitch Ratings' downgrade earlier this month on Hong Kong's long-term foreign-currency-issuer default rating to "AA" from "AA+".
In a statement, the ratings agency said: "Moody's has previously noted that a downgrade could be triggered by a shift in the current equilibrium between the Special Administrative Region's (SAR's) economic proximity to and legal and regulatory distance from China".
It added: "The decision to change Hong Kong's outlook to negative signals rising concern that this shift is happening, notwithstanding recent moves by Hong Kong's government to accommodate some of the demonstrators' demands."
The institutional features that grant Hong Kong greater political and economic autonomy - together with the city's intrinsic credit strengths - accounted for Hong Kong's higher rating than China, the agency said, as reported by Reuters.
Hong Kong's Chief Executive, Carrie Lam told a group of businessmen in late August that her "political room for maneuvering is very, very, very limited", because the unrest has become a national security and sovereignty issue for China.
The longer the standoff continues, the greater the risk that Hong Kong's attractiveness as a global economic and financial centre would be diminished, Moody's said. Dwindling capacity for the government to implement certain policies could "undermine key drivers of its competitiveness and macroeconomic stability."
However, Moody's affirmed HK's Aa2 rating, citing "strong fiscal and external buffers, with a minimal government debt burden, large fiscal reserves and ample foreign exchange reserves".
It said it would "likely downgrade Hong Kong's rating" if it concluded the protests, or measures taken by the Hong Kong government to resolve them, were likely to damage Hong Kong's medium-term economic prospects, or "signify an erosion in the predictability and effectiveness of its governing, judicial and policymaking institutions."
Hong Kong's Financial Secretary, Paul Chan, rejected Moody's downgrade, describing the rationale behind it as "groundless". He emphasised that Hong Kong is still the world's best place to do business, and its competitive edge has not been affected by the unrest.

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