Earlier this week the rating agency Fitch downgraded Hong Kong’s credit rating to AA- from AA with a stable outlook. After the political and social unrest that affected Hong Kong for a large part of last year, the economy is now in the grips of the global COVID-19 pandemic. Fitch has forecast that Hong Kong’s GDP will fall by 5% in 2020, following the 1.2% that the economy contracted last year. The agency does expect a recovery in 2021 of 3.5%. Fitch also noted the downgrade reflected its view that gradual integration into China's financial, economic, and political fabric will support a closer alignment of their respective sovereign ratings. Fitch rates China as A+ / stable.
Fitch did touch on the increasingly violent anti-government protests that affected the island last year. It believes that although the clashes have receded amid the current global health crisis, the underlying problems remain unresolved. This, they believe, leaves a ‘lingering uncertainty’ into the business environment which could ‘further tarnish international perceptions of the territory's governance, institutions, and political stability’.
Also this week, the Hong Kong Monetary Authority (HKMA) had to step into the currency market after the Hong Kong dollar (HKD) strengthened to the top of its trading band. The HKD has been pegged to the US dollar since 1983. In 2005, a trading band was created with a trading range of 7.75 to 7.85 to the USD. The HKD strengthened as higher rates at the city’s bank attracted capital inflows. Eddie Yue Wai-man, the HKMA chief executive said in statement, ‘The strengthening of Hong Kong dollar's exchange rate was driven by increases in market carry-trade activities and equity-related demand for Hong Kong dollars’. In total the HKMA sold just over HKD4.3bn over Tuesday and Wednesday.