Can Hong Kong afford a credit rating cut?

Financial analysts warn that if a downgrading occurs, it will erode the SAR's economic competitiveness, reports Oswald Chan.

In its latest credit rating report on Hong Kong, Standard & Poor's Financial Services LLC said that "although the political polarization surrounding Hong Kong's (chief executive) election reform has sometimes made decision-making in the Legislative Council lengthier and more contentious than before, in our base-case scenario, we do not expect the tension to significantly affect the effectiveness of governance, given the government's strong record and the likely pragmatic approach of most politicians".

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However, the global credit ratings agency said: "We could lower the ratings if Hong Kong's political polarization becomes much worse than we expected and significantly compromises policymaking (decisions) and the business environment. The issue of political polarization could amplify external risk if volatility in global financial markets increases sharply."

Hong Kong recently has witnessed heated debate over the nomination process for the chief executive election in 2017, triggering calls to "Occupy Central" and carry out a civil disobedience campaign to paralyze business in the city's prime financial district.

In addition to the risk of political polarization, there are other factors that can weigh on the special administrative region's creditworthiness, including limited monetary flexibility under the city's long-established linked exchange rate system and the risks associated with weaker institutions on the mainland, according to S&P.

The ratings agency stressed in its report that "the increasing economic and administrative integration with the mainland has also increased Hong Kong's exposure to changes in administrative policies and weaker civil institutions on the mainland. As Hong Kong is a special administrative region of China, movements in the mainland ratings may affect Hong Kong's ratings. Hong Kong cannot be completely insulated from less-developed mainland institutions while economic integration with the mainland continues".

Chong Tai-leung, an economics professor at the Chinese University of Hong Kong's Institute of Global Economies and Finance, said: "If Hong Kong's credit rating is downgraded, it will send a negative signal indicating the investment environment in the city may turn bad in the future.