The SAR Government yesterday strongly rejected the move by Standard & Poor's to downgrade Hong Kong's sovereign credit rating by one notch, saying the global ratings agency had failed to understand its recent decision to intervene in stock and futures markets.
The international ratings agency downgraded Hong Kong's long-term foreign currency credit rating to A from A plus and short-term rating to A-1 from A-1 plus, with a negative outlook.
The agency pointed out that the intervention - which had, by some estimates, used up about US$15 billion of reserves - changed the mix of financial assets backing the Hong Kong dollar.
'As the bearish sentiment against the Hong Kong dollar shows no signs of abating, further share purchases could follow,' S&P said.
'Once these operations cease, however, the HKMA's [Hong Kong Monetary Authority] portfolio likely will suffer significant losses unless the downward trend in global equity prices is reversed.' Associate director for global ratings development Katrina Tai added: 'The risk is increasing, it doesn't matter what they [the Government] are buying, the risk level of holding equity and futures is higher than if they held cash.' In a strongly worded statement, the Government rejected the agency's claims, saying intervention had been conducted to deter stock and futures market manipulation by speculators who were attacking the local currency.
The statement said: 'As a responsible Government we must take all necessary steps to protect the stability and integrity of our currency and financial markets when they are under speculative attack.' The agency further pointed out Hong Kong's reserves backing the local currency, which stood at US$96.5 billion last month, were set to fall with or without the intervention, as the Government would have a budget deficit which could reach up to 3 per cent of the SAR's gross domestic product.
The deficit was expected to persist next year as the downturn in economic activity drove domestic prices, nominal incomes and the general price levels lower.