S&P outlook on HK's local currency rating boosted to stable

Standard Poor's Ratings Services Tuesday revised the outlook on its "AA-" long-term local currency rating on Hong Kong to stable from negative, saying the outlook revision reflects better prospects for policymakers to reverse fiscal deficits due to faster economic recovery.

At the same time, all the sovereign ratings on the special administrative region were affirmed. Hong Kong's foreign currency ratings are: A+/Stable/A-1, local currency: AA-/Stable/A-1+.

"Three main elements have boosted fiscal prospects for the Hong Kong Special Administrative Region (HKSAR) government," said credit analyst Ping Chew, director, Standard and Poor's Sovereign International Public Finance Ratings Group.

"These are economic upturn, expected end to deflation, and rising consumer confidence," he said. Previously forecast at 6 percent of GDP, the deficit is now likely to come in at less than 5 percent. Improvement has been made on both sides of the fiscal equation, with tighter expenditure control ahead of schedule, and revenues boosted by rising land sales and stamp duty revenues as well as improving economic prospects.

"The overall rosier picture for general government finances in an environment of economic growth means that the deterioration in public finances should slow, boosting chances for meeting the target of budget balance by 2008/2009," said Chew.

"Nevertheless, although the resumption of faster growth and increased liquidity in financial markets have eased pressure on the budget, the territory's fiscal position remains vulnerable to shocks and economic cycles," he warned. A narrow tax base and

rigidities in the fiscal accounts limit Hong Kong's room for maneuver. The budgetary difficulties since 1997 also reflect the challenges of the political transition and administrative processes.

Having said that, with fiscal reserves at more than 18 percent of 2004 GDP, Hong Kong is still one of the few net creditor governments globally, and has a resilient, flexible, and prosperous economy, Chow believed.

The stable outlook incorporates expectation that fiscal deficits will narrow gradually, slowing the erosion in Hong Kong's fiscal flexibility. The government's medium-term fiscal consolidation strategy can be underpinned by continued commitment to expenditure and revenue discipline. Nevertheless, Hong Kong's revenue structure has to be reconfigured in future budgets, and economic growth maintained, he said.