Rating agency lifts the outlook for HK

PUBLISHED : Wednesday, 26 July, 2006, 12:00am
UPDATED : Wednesday, 26 July, 2006, 12:00am

Fitch upbeat but warns about external shocks

Fitch Ratings has raised the outlook from stable to positive for its AA- long-term foreign currency rating for Hong Kong, reflecting the city's improved fiscal health.

The international ratings agency said prospects for future revisions could be buoyed if the government showed it could further control its spending and maintain a budget surplus.

The long-term local currency rating is unchanged at AA+ with a stable outlook.

The change in foreign currency outlook follows similar moves by ratings agency Standard & Poor's and Moody's Investors Service.

The government welcomed the revision but called for a more favourable rating, given the soundness of its finances. Hong Kong's operating and consolidated accounts reported a surplus for 2005-06, the first since the handover.

But James McCormack, senior director of Fitch (Hong Kong) and head of Asia sovereign ratings, warned the economy still suffered from unstable revenue sources and was susceptible to external shocks and mainland political risks.

Financial Secretary Henry Tang Ying-yen said the government would continue to rein in public spending and examine how best to broaden the tax base.

Fitch supports the introduction of a goods and services tax as 'an important first step' towards stabilising revenues but does not see it being implemented before 2010. Mr Tang last week launched a nine-month public consultation into the controversial levy.

'We note the concerns expressed by Fitch for the potential risks related to the fact that Hong Kong is part of China. We hope that the solid track record in the strict adherence to the 'one country, two systems' principle will convince international credit rating agencies to accord us a higher rating that is in line with our economic fundamentals,' Mr Tang said.

Hong Kong's economic integration with the mainland made the city the obvious beneficiary of its double-digit economic growth, Mr McCormack said. But he warned that potential risks could still arise from Hong Kong's political ties to Beijing.

'Policy autonomy in Hong Kong must be maintained' regarding the economy, Mr McCormack said.

Fitch expects Hong Kong's economy to expand by 6.3 per cent this year and the fiscal surplus to be maintained at about 1 per cent of the gross domestic product in the medium term.