The Hong Kong government's credit rating remains unaffected as the "Occupy Central" protests continue into a second week, Moody's Investors Service said in a note on Monday.

Moody's credit rating for the government is still Aa1, the company's second highest rating and the outlook is stable.

Tom Byrne, senior vice president of Sovereign Risk Group Asia-Pacific and Middle East, Moody's Investors Service, wrote in the note, "The rating is supported by the SAR's strong buffers - financial, institutional and economic. The credit implications of the ongoing confrontation between the protesters and the Hong Kong government are not significant enough to undermine such buffers."

He indicated that confidence remains in the SAR's exchange rate peg, and the Hong Kong Monetary Authority has stated that operations remain normal in the payment and settlement systems, interbank markets and core functions of the banking system.

Moreover, Hong Kong's fundamental buffers are substantial. The government has built up its fiscal reserves to a very high level, equivalent to 36 percent of GDP. These reserves far exceed the very small level of government debt.

Hong Kong has the largest net international investment positions in the world, with systemic foreign assets abroad exceeding foreign liabilities by an amount equivalent to 280 percent of GDP at the end of 2013. Thus, even some reversal of capital flows would be easily accommodated, Byrne added.

While the impact of the demonstrations will likely have negative consequences on Hong Kong's near-term economic performance, the key pillars of the SAR's economy that provide more than half of its output - trade and logistics, financial, and professional services - do not seem to be directly affected by the political disorder. Moreover, its economy has proved resilient to previous downturns, such as during the 2008-09 global financial crisis and the SARS epidemic, he wrote.

But Moody's worried that prolonged, disruptive demonstrations or a violent confrontation that lead to an unbridgeable divide between the government and the "pro-democracy" activists would be credit negative, if such a situation was to hamper Hong Kong's ability to function as a global financial center or to undermine the SAR's "One Country, Two Systems" political and economic constitutional arrangement with the central government.

Although there is no data yet to assess the impact of the "Occupy Central" protests on the economy, Financial Secretary John Tsang Chun-wah said it is certainly hurting sectors like the food and beverage, exhibitions and events, tourism, and retail.

Tsang stressed that the local financial market can handle the protests' impact in the short-term, but a prolonged protest would adversely affect it, damaging the city's standing among international investors.

"If this situation were to persist, then we are going to see some damage to our system, and particularly our utmost concern is about our reputational risk as well as the confidence in the market system in Hong Kong. That would be a permanent damage that we could not afford," he said.

Fitch's Hong Kong credit rating remains at AA+ with stable outlook. The rating agency said it does not expect the protests to affect the SAR's ratings in the short term.

felix@chinadailyhk.com

A citizen walks past a shopping mall, which was still shut down on Monday in Causeway Bay, one of city's most famous retail areas. The city usually embraces a "Golden Week" during the National Day holiday, yet popular shopping centers were forced to close due to the blockades of the protesters.? Parker Zheng / China Daily

(HK Edition 10/07/2014 page8)