Ongoing protests insufficient to undermine Hong Kong's strong buffers: Moody's

Hong Kong's Aa1 rating remains.

The Government of Hong Kong’s Aa1 rating and stable outlook remain supported by the Special Administrative Region’s (SAR) strong buffers -- financial, institutional and economic -- as the Occupy Central protests continue into a second week.

According to a statement from Moody’s Investors Service's Tom Byrne, Senior Vice President/ Manager of the Asia-Pacific and Middle East Sovereign Risk Group, Moody's thinks the credit implications of the ongoing confrontation between the protestors and the Hong Kong government are not significant enough to undermine such buffers.

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.

Here's more from Moody's Investors Service:

Moreover, Hong Kong’s fundamental buffers are substantial; the government has built up its fiscal reserves to a very high level, equivalent to 36% of GDP.

These reserves far exceed the very small level of government debt. And 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% of GDP at the end of 2013.

Thus, even some reversal of capital flows would be easily accommodated.

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.

Nonetheless, 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 were 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 in Beijing.