Moody’s Investors Service has today downgraded the long-term issuer and senior unsecured ratings of the Government of Hong Kong to Aa3 from Aa2 but changed the outlook from negative to stable.

Moody’s credit rating of Hong Kong was determined by its view on “lower than previously estimated” strength of the Chinese-ruled city’s institutions and governance, which nonetheless remain “markedly stronger than China’s (A1 stable)”.

“The absence of tangible plans to address either the political or economic and social concerns of the Hong Kong population that have come to the fore in the past nine months may reflect weaker inherent institutional capacity than Moody’s had previously assessed,” the agency said in a statement on Monday.

Dissatisfied with existing policies, Hong Kongers continue to take to the streets, with many social gatherings leading to clashes with the police. Hong Kong anti-government protests escalated last June over a bill which would have allowed those arrested in the territory to be sent to mainland China for trial. The extradition plans were finally withdrawn in September, but protesters have since broadened their demands for democratic reforms, better living standards and a higher degree of autonomy.

In its Monday’s statement, Moody’s regarded the response by Hong Kong’s government to both political demands by parts of the population and broader concerns about living standards in the SAR, housing costs and equality of economic opportunities as “notably slow, tentative and inconclusive”. The ratings agency does not expect that the measures announced since last August will effectively improve housing affordability or start addressing demands for a more equal distribution of income and wealth.

Yet, the stable outlook at Aa3 reflects superior fiscal strength and consistent macroeconomic stability, which Moody’s expects to persist through a period of heightened uncertainty about political and social developments associated with weak or negative GDP growth.

As reported by Reuters, Hong Kong’s government said it strongly disagreed with Moody’s assessment and was “deeply disappointed” by the decision. “Although Hong Kong has faced the most severe social unrest since its return to the Motherland in the past seven months or so, the HKSAR Government, with the staunch support of the Central Government, has firmly upheld the ‘one country, two systems’ principle and handled the situation in accordance with the law to curb violence on its own to restore social order as soon as possible,” it said.

Hong Kong Chief Executive Carrie Lam said she was very disappointed by Moody’s decision to downgrade the city’s credit rating. “I am even more disappointed by their assessment of the Hong Kong situation, and their comment on the weak institutions and governance,” said Carrie Lam in an interview with CNBC during the annual World Economic Forum meeting in Davos. “Because after seven months of social unrest, what has proven to be resilient is Hong Kong institutions, and also Hong Kong governance.”

Hong Kong’s leader suggested that there was “perhaps something at work” in the world’s coverage of Hong Kong’s protests. “It is for all to see that what has happened in Hong Kong on this occasion has attracted disproportionate commentary from Western media, from overseas governments and politicians,” she said.

Meanwhile, Hong Kong’s local economy is suffering from long-running protests. According to the Census and statistics department (C&SD), Hong Kong’s retail sales plunged more than 24% in October from a year earlier, marking the biggest monthly decline on record. Increasing violence depressed consumption sentiment and severely disrupted tourism- and consumption-related activities.

Retail sales continued to fall sharply in November as the local social incidents turned extremely violent, causing very severe disruptions to tourism- and consumption-related activities and further dampening consumption sentiment. That month the government warned the city is expected to sink into its first annual recession in a decade.

The near-term outlook for Hong Kong’s economy continues to hinge on how the local social incidents will evolve. At present, 31% of business owners – mostly in the hospitality, retail and logistics industries – expect worse conditions for Q1 2020. Output, such as volume of business, sales, and construction, are projected to go down, particularly in the accommodation services, retail, construction, transportation, storage and courier services. As such, ending violence and restoring social order are essential to the recovery of the whole economy in Hong Kong.

In September, Fitch downgraded Hong Kong’s rating to “AA” from “AA+”.

Additional reporting by Arjun Nagraj and Wang Lee

Image: Hong Kong, China / Marci Marc