Skyscrapers along Victoria Harbour are shrouded in mist. Hong Kong is entering a technical recession in the third quarter. Photo: Asia Times

Moody’s Investors Service has downgraded the credit rating of Hong Kong to Aa3 from Aa2, citing reduced strength of its institutions and governance. The outlook was revised to stable from negative.

Hong Kong’s seven-month-long protests were triggered by a now-abandoned proposal to allow extraditions to the authoritarian mainland, where the opaque legal system answers to the Communist Party.

The movement has since then grown into demands for greater freedoms in what is the most concerted challenge to Beijing’s rule since the former British territory’s 1997 handover.

Moody’s had put Hong Kong’s rating on negative outlook in September to reflect the growing risks of damage to the government institutions from the anti-government protests and the negative impact it would have on the city’s attractiveness as a trade and financial hub.

On Monday, following the downgrade, Moody’s said in a statement: “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 rating agency said it could have more significant constraints on the autonomy of the Special Administrative Region’s (SAR) institutions than previously thought, calling the underlying drivers of the protests “deep-seated and intractable.”

Rival rating agency Fitch had lowered Hong Kong’s rating to AA from AA+ in September, noting that persistent conflict and violence were testing the perimeters and pliability of the specially administered region’s “one country, two systems.”

Hong Kong’s economy slipped into a technical recession last year after contracting by 3.2% quarter-on-quarter in real terms in the third quarter of 2019, following a fall of 0.5% in the preceding quarter. The government, blaming the social unrest, slashed its GDP forecast for the year to -1.3% from the 0-1% forecast made in August, making it the first annual contraction since 2009.

The government also announced several fiscal stimulus packages since last August, but Moody’s said it does not expect these steps to improve housing affordability or to start addressing demands for a more equal distribution of income and wealth.

Moody’s warned that measures taken by foreign governments in response to perceived changes in Hong Kong’s autonomy could negatively impact its competitiveness and economic strength and hinder the effectiveness of policymaking still further.

In October, the lower chamber of the US Congress passed the Hong Kong Human Rights and Democracy Act of 2019. The bill empowers the US Department of State and other agencies to conduct an annual review to determine whether changes in the SAR’s political status justify changing the nature of US trade policy with Hong Kong.

While Moody’s defines a stable outlook as an indication of a low likelihood of a rating change over the medium term, it also said a further downgrade could be triggered if it concludes that Hong Kong’s economic strength and the quality of its institutions are weaker than currently assessed.

“In particular, still closer institutional integration between Hong Kong and China would likely constrain the autonomy of Hong Kong’s legislative, judiciary and/or executive still further, contributing to a downgrade,” it said.

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