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Louis Beckerling

Borrowing costs in Hong Kong may fall further following the decision by ratings agency Fitch to raise the credit rating on Government-issued long-term foreign currency bonds to an all-time high of AA minus.

The move means the Hong Kong Government could shave between five and 10 basis points off its borrowing costs the next time it goes to global debt capital markets for funds with the improved credit rating, according to fixed-income analysts.

A 10-basis point saving on the yield at which a foreign currency bond could be issued in the market would translate into a US$1,000 saving per US$1 million of borrowings, or US$500,000 a year on a US$500 million bond.

But the immediate reaction on bond markets to news of the upgrade was tempered by fresh bond issues in the pipeline, according to Stephen Cheng, head of fixed income credit research (Asia), for UBS Warburg.

'In theory a higher rating should help to lower potential funding costs. But the reality is that Hong Kong credits were slightly weaker today - by about three basis points,' Mr Cheng said.

'This was in line with the market, which ended the day being several basis points lower, and also due to new issues in the pipeline.

'There are a few deals expected in the next few weeks so investors may be doing a bit of profit-taking and switching out and preparing money for the new deals.'

Stephen Li, head of investment banking and debt markets in Asia for Barclays Capital, said the higher rating could trigger lower borrowing costs for SAR firms if the sovereign review were followed by a review of corporate borrowers' credit.

The decision to lift the rating one notch from A plus to AA minus was a vote of confidence in the Hong Kong economy and the strength of its currency board, Fitch associate director Therese Feng said.

Speaking from the agency's London office, Ms Feng said the move 'attested to the very capable handling and management of the Hong Kong currency board' as well as the strength of the SAR's economy.

In its announcement, Fitch said it would upgrade Hong Kong's long-term foreign-currency rating to AA minus from A plus. It affirmed the long-term local currency rating at AA plus.

The short-term rating remains at F1 plus and the outlook on the long-term rating is stable.

Although the rating is the agency's highest ever given to Hong Kong, and is also one of the highest attached to Asian credits, it is below Singapore and Japan (AA plus), and Australia (AA).

The currency board system, which pegs the Hong Kong dollar to a fixed rate against the US dollar, had withstood the Asian crisis and remained unscathed in a recent challenge to the Argentine currency board system, Ms Feng said.

'So it attests to the very capable handling and management of the Hong Kong currency board. It also anticipates quite solid medium-term prospects for Hong Kong, given China's impending access to WTO [World Trade Organisation] and the fact that Hong Kong is positioned to provide the financial and legal services to China which will be needed for its restructuring,' she said.

Ms Feng hinted at a possible upgrade for China's long-term foreign currency rating, which Fitch set at A minus.

'We will be looking at the China rating. We recently completed our due diligences and once we have finished the review process the ratings will either be affirmed or changed,' she said.

In its statement released in London overnight, Fitch said the upgrade reflected Hong Kong's 'robust fiscal and external financial positions, the sustained credibility of its currency board arrangement, and excellent medium-term economic prospects, given China's pending accession to the WTO'.

'In 2000 Hong Kong's economy posted a vibrant recovery after demonstrating its ability to withstand a severe economic stress test during the Asian crisis of 1997-98,' it said.

'Throughout that period, [China] strictly respected Hong Kong's economic and policy autonomy.'



Fitch rating opens tap to cheaper funding flow