HONG KONG—Moody’s downgraded Hong Kong’s credit rating on Monday, slashing its assessment on the Asian financial center and blaming the government’s failure to deal with seven months of social unrest that has driven the economy into recession.
The firm cut its main rating on Hong Kong by one notch to Aa3 from Aa2, saying the downgrade reflects concerns over the city’s institutions, governance strength and “more significant constraints” on the territory’s autonomy from mainland China.
The downgrade comes after Fitch Ratings made a similar assessment on Hong Kong in September.
Antigovernment protests have crippled the tourism industry and the retail sector, helping push Hong Kong into a recession for the first time since the financial crisis. Earlier Monday the government said the unemployment rate rose to 3.3% for the October-to-December period, the highest since March 2017 and above the 2.8% rate before the protests started.
“The absence of an effective response by Hong Kong’s executive and legislative branches of government to the concerns that have contributed to the continuing protests, and the inertia which has increasingly characterized the legislative and executive branches, indicates weaker institutions and governance strength than Moody’s previously assessed,” the firm said.
In a statement, the Hong Kong government said it strongly disagreed with the Moody’s assessment, adding that the new rating “falls way out of line with Hong Kong’s sound credit fundamentals.”
A lower credit rating could lead to higher borrowing costs for the government and Hong Kong companies. The move puts Moody’s rating one notch below Fitch’s current assessment of Hong Kong at AA. S&P Global Inc. rates Hong Kong at AA-plus, the highest of the three credit-ratings firms.
Moody’s also changed its outlook to “stable” from “negative,” a view that reflects the government’s minimal debt burden and large foreign-exchange reserves. Analysts say this should help the city maintain the Hong Kong dollar’s peg to the U.S. dollar even amid social and political uncertainty.
In its first downgrade of Hong Kong since May 2017, Moody’s described the underlying factors behind the protests as “deep-seated and intractable.” It said fiscal stimulus packages announced by the government wouldn’t go far enough to improve housing affordability or income inequality—which are among the worst in the world.
“The response by Hong Kong’s government to both political demands by parts of the population and broader concerns about living standards…housing costs and equality of economic opportunities has been notably slow, tentative and inconclusive,” Moody’s said.
The firm also said the city’s autonomy could face more significant constraints under ‘one country, two systems,’ which governs Hong Kong’s relationship with mainland China. Fitch made a similar assessment in September in its downgrade, saying social unrest and political turmoil were testing “the perimeters and pliability of the governing framework.”
Protests have roiled Hong Kong since June last year, when the government proposed an extradition bill that would have allowed the city’s citizens to be sent for trial in mainland China’s opaque justice system. Though the bill was later scrapped, mass demonstrations have continued as protesters have expanded their demands to include an investigation into alleged police brutality during the protests and the right to directly elect leaders.
Thousands of people gathered in the city’s financial district on Sunday —many wearing the black garb and face masks synonymous with the protest movement—to demand universal suffrage. What started as an approved gathering by police ultimately showed signs of turning into a march, which wasn’t approved. Police said protesters began getting violent and fired tear gas to disperse the crowd.
Write to Steven Russolillo at steven.russolillo@wsj.com
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