S&P keeps Hong Kong's AA+ rating despite protests, cites strong finances

S&P maintained Hong Kong's AA+ credit rating with a stable outlook on Tuesday despite increasingly violent protests, breaking with the other two big global credit rating agencies.

Hong Kong's "strong economic and financial metrics will allow the government's credit standing to withstand the fallout from the ongoing social unrest," S&P Global Ratings said in a news release.

Growing violence on Hong Kong's streets has added to pressure on the open economy from the protracted U.S.-China trade war, prompting Fitch Ratings to cut the city's rating by a notch last month to AA, while Moody's switched its outlook to negative from stable but kept its Aa2 rating.

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VCG Photo

Many analysts believe the city, one of the world's most important trade and business hubs, has slid into its first recession in a decade. Pillar sectors including tourism and retail sales have plummeted, threatening heavy job losses.

S&P said near-term economic growth will be muted, but added that short-term stimulus measures will be implemented to support the flagging economy, with the government incurring fiscal deficits in the next one to two years.

Hong Kong dollar immune to protests, disappointing shorts

Despite a variety of key economic indicators and pillar sectors of Hong Kong have rapidly turned south in the past few months, the Hong Kong dollar hasn't once reached the weak end of its trading band against the greenback. The last time it was in serious danger of touching the weak limit of 7.85 Hong Kong dollar was in May. 

While a lack of substantial capital outflows may be providing some support, a narrowing of the gap between local and U.S. borrowing costs is likely to be having a bigger impact. At the end of February, the Hong Kong one-month interbank rate (known as Hibor) was about 1.6 percentage points below the U.S. Libor equivalent, making it profitable to short the local currency and buy U.S. assets. Now the gap is less than 25 basis points.

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VCG Photo

"Normal drivers of the currency have been more favorable," Bloomberg cited Mitul Kotecha, a senior emerging markets strategist at Toronto-Dominion Bank. "The Libor-Hibor spread has remained low. Liquidity pressures that have existed in the past and put pressure on the peg are just not there."

Hedge funds including Hayman Capital Management are betting the unrest, which will spur capital flight, drive up interest rates and force the abandonment of a currency policy that has supported Hong Kong's economy for more than three decades, Bloomberg reported. 

But for Kotecha, the fact the currency has been resilient so far shows it's not something to seriously worry about.

"If the peg hasn't come under pressure after this many weeks, is it going to come under pressure any time soon?" Kotecha said. "Most investors would feel it's been well controlled until now."

(With input from Reuters)