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Moody's downgrades Hong Kong amid ineffective government response to protests

Moody's downgraded Hong Kong's long-term issuer and senior unsecured ratings to Aa3 from Aa2, saying the city's institutions and governance have become weaker than previously estimated as pro-democracy protests remain unresolved.

The rating agency said the Hong Kong government has not made an "effective" response to the "deep-seated and intractable" concerns that triggered the ongoing protests that started in early June 2019.

"The response by Hong Kong's government to both political demands by parts of the population and broader concerns about living standards in the [Special Administrative Region], housing costs and equality of economic opportunities has been notably slow, tentative and inconclusive," said Moody's, which also revised Hong Kong's outlook to stable from negative due to the city's fiscal strength and macroeconomic stability.

Hong Kong's credit profile is under threat amid pressures on its institutions, Moody's said, adding that changes to Hong Kong's institutional autonomy would increase the possibility of foreign government intervention hurting the city's economic strength, competitiveness and policy-making effectiveness.

The rating agency said Hong Kong's its "aaa" fiscal strength, which is underpinned by "large" fiscal reserves and "minimal" government debt burden, supports its credit rating.

Hong Kong maintains a one-notch sovereign rating gap over China, according to Moody's, as the city's governance and institutions remain "markedly" stronger than those in the mainland.

"Over time, the closer institutional and economic linkages between Hong Kong and China become, the more closely the two ratings will converge," Moody's said.