HONG KONG: Fitch Ratings has cut its forecast on Hong Kong's economy in 2009 to a contraction of 9.1 percent, following the downgrades of other Asian economies.

Previously, the ratings agency had expected Hong Kong to suffer a 6.4 percent decline this year. The city's sovereign rating of AA would not be downgraded because of strong public finances and a stable banking sector, Fitch said yesterday.

"It's mainly due to the slowdown in exports," James McCormack, head of Asia-Pacific Sovereign Ratings at Fitch, said in Hong Kong.

The SAR government expects the city's gross domestic product (GDP) to contract 5.5-6.5 percent this year, down from a forecast decline of up to 3 percent. The city's economy grew 2.5 percent in 2008.

Fitch also lowered its forecasts on Taiwan, saying the island's economy could contract as much as 8.2 percent, compared with March's prediction of a 5.7 percent decline. Singapore, however, bucks the downgrade trend, as Fitch predicts the country's GDP will drop 11 percent, better than the April forecast of a 12.6 percent decline.

However, Standard & Poor's, another ratings agency, said the same day that the worst was over in the Asia-Pacific region after some positive indicators.

Standard & Poor's sovereign credit analyst Kim Eng Tan said that recent positive signs have emerged. "Stock markets have rebounded from their decade-lows. The LIBOR-OIS spread - a measure of the unwillingness of banks to lend - has narrowed significantly, too, helping to bring down banks' funding costs to where monetary authorities intend them to be," he added.

Although this does not mean the region has escaped the turmoil in the global economy and the international financial markets. "Steep declines in exports, especially in East Asia, have led to significant contractions in economic output," Tan said.

As a result, corporate defaults will likely rise in the next year or so. He said the pressure will mount on banking systems in the region, particularly those that are highly leveraged.

Standard & Poor's said in its report that fiscal deterioration resulting from stimulus and banking-sector-support measures will continue to put pressure on a number of sovereign ratings in the medium term. The agency therefore downgraded the ratings on Taiwan and India to "negative" from "stable".

Hong Kong's Hang Seng Index fell for a second straight session yesterday, along with other Asian markets, as investors' confidence waned.

(HK Edition 06/10/2009 page4)