- Continued anti-government protests could further tarnish the city’s business environment, rule of law and government institutions, warn the ratings agency
- Last Friday, Fitch cut Hong Kong’s credit rating for the first time since 1995, trimming it by one notch to AA from AA+
Prolonged anti-government protests in Hong Kong will only cause greater damage to the city's reputation, said Andrew Fennell, the head of sovereign ratings at Fitch Ratings, on Tuesday, pointing to the possibility of a further downgrade in the city's credit rating.
Last Friday, Fitch stunned city leaders by cutting Hong Kong's credit rating for the first time since 1995, trimming it by one notch to AA from AA+. The downgrade was due to months of conflict and violence that amount to the largest test to the "one country, two systems" framework witnessed in the 22 years history of the Hong Kong Special Administrative Region, Fitch said.
The outlook for the city's credit rating was also cut to negative from stable even after Chief Executive Carrie Lam Cheng Yuet-ngor announced last week that the controversial extradition bill would be withdrawn, meeting one of the five demands laid out by protesters.
The rating agency followed the sovereign rating downgrades with another announcement on Tuesday lowering MTR Corporation's long-term foreign- and local-currency issuer default rating from AA+ to AA with a negative outlook.
Continued political unrest would further tarnish international and domestic perceptions of Hong Kong, including its business environment, rule of law and government institutions, Fennell said.
"In spite of some concessions to protesters' demands, we believe that there is still a chance that public discontent will linger," Fennell said. "It is still an ongoing conflict and it hasn't yet been resolved and that is reflected in the negative outlook."
Historically, a Fitch negative outlook turns into a rating downgrade in an average period of between eight and nine months.
Lam shrugged off last week's downgrade, insisting that what has happened in the past few months did not undermine the one country, two systems framework. But protesters have continued to demonstrate in the past week, pressing for their remaining four demands, with radicals engaging in some of the most violent incidents in the 14 weeks of conflict.
Fitch also announced on Tuesday that it had cut its growth forecasts for China, Europe and the United States, saying the recent escalation of the US-China trade war and uncertainty over the risks of Britain exiting the European Union without a deal were "darkening" the global economic outlook for the next 18 months.
The credit ratings agency cut its forecast for Chinese growth to 6.1 per cent in 2019 from the previous projection of 6.2 per cent and its 2020 outlook to 5.7 per cent from 6 per cent. It now expects US gross domestic product to grow 2.3 per cent this year and 1.7 per cent next year, below it previous forecasts of 2.4 per cent and 1.8 per cent, respectively.
In spite of some concessions to protesters' demands, we believe that there is still a chance that public discontent will linger. It is still an ongoing conflict and it hasn't yet been resolved and that is reflected in the negative outlookAndrew Fennell
Fitch also reduced its growth outlook for the countries that make up the Eurozone to 1.1 per cent for both 2019 and 2020, down from 1.2 per cent and 1.3 per cent, respectively. The rating agency said that growth prospects in the Eurozone would be "materially lower" if Britain leaves the European Union at the end of October without a transition agreement, known as a no-deal Brexit.
"While the global growth slowdown witnessed over the last 12 months reflected a variety of causes " including an earlier move towards more restrictive credit conditions in China, the tightening of global (US) dollar liquidity through 2018 and significant macro challenges in some large emerging markets " the primary cause of the deteriorating outlook for the next 12 to 18 months is trade policy," Fitch said.
The US and China have been engaged in a trade war for more than a year, with US President Donald Trump placing tariffs on around US$360 billion of Chinese goods and threatening to add additional duties on another US$160 billion in December as he tries to change decades of Chinese industrial and trade policy. Beijing has responded with its own retaliatory tariffs and curbs on buying American agricultural products, such as soybeans.
"Our initial estimates suggest that this shock will reduce China's growth in 2020 by 0.3 (percentage point) relative to our June (global economic outlook) baseline, even allowing for additional policy easing, including through cuts to banks' reserve requirement ratios," Fitch added.
"We continue to expect a restrained policy response, with any further credit stimulus to be relatively modest, so as not to reverse the deleveraging campaign (to reduce debt and risky lending). Domestic demand growth has remained sluggish in China, with manufacturing investment curtailed by trade uncertainty, soft consumer spending growth " partly reflected in car sales, which are down by over 10 per cent (year on year) so far this year " and slowing housing starts."
Fitch said that the slowdown in China is having an "increasingly pronounced" effect on the global economy and was playing an important factor in recent growth disappointments in Europe, particularly in Germany, which is dependent on growth in global trade.
However, Fitch said it does not see an imminent risk of recession in the US.
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