HONG KONG: International ratings agency Moody's yesterday changed its outlook on Hong Kong to positive from stable, as the resilient and robust macroeconomic condition on the mainland continues to boost the city's economic prospect.

The international credit-rating agency said the financial strength of Hong Kong remains very high, despite government budget deficits projected for the next few years.

"The very low level of government debt and large fiscal reserves underpin the high rating of the Hong Kong government," said Steven Hess, Moody's lead analyst for Hong Kong.

In addition, Hong Kong's high per capita income, institutional strength, separate currency and international reserves all justify a very good rating, said Moody's, which gave an Aa2 rating to the city's government bonds.

Hess noted that rapid growth of the mainland economy and specific measures taken by Beijing to assist Hong Kong, including the Closer Economic Partnership Arrangement (or CEPA), have been positive for the SAR.

However, he added that Hong Kong's rating is marginally lower than its intrinsic credit strength, as the residual mainland effect constrains the city's upward rating potential.

Chong Tai-leung, Associate Professor at the Economics Department of the Chinese University, said Hong Kong economic data has improved quite a lot in the second half, though the local economy is yet to completely recover.

"The economy in Hong Kong has performed much better than that in Asia, the US and Europe. Unlike the unemployment rate in the US, which is yet to surge, the unemployment rate in Hong Kong may have already reached its peak," Chong said.

He added that the Hong Kong government has a strong capital reserve, which can support further improvements in the city's government bond rating.

Hang Seng Bank, meanwhile, expects the Hong Kong economy to resume growth in the final quarter, as the global economy seems to be on track for a recovery.

The Bank forecasts the city's GDP to contract 1.5 percent in the third quarter, while it has also revised upwards the 2009 GDP outlook for contraction, estimating a smaller drop of 3 percent, compared with its initial estimate of a decline of 4 percent.

Yesterday, Moody's also changed the mainland's rating outlook to positive from stable, saying that the central government has successfully steered the economy through the turbulence of the global financial crisis and recession.

"While the authorities have been orchestrating a huge economic stimulus program in response to the global crisis, the effects on government finances have been modest and do not appear to pose unmanageable risks to the government's very high financial strength," said Tom Byrne, a Moody's senior vice president.

The credit-rating agency also raised its ratings for seven mainland banks to positive from stable, benefiting from the strong support by the central government.

The seven banks include Industrial and Commercial Bank of China, China Construction Bank Corporation, Bank of China, Agricultural Bank of China, China Development Bank Corporation, Export-Import Bank of China and Agricultural Development Bank of China.

(HK Edition 11/10/2009 page3)