Fitch cut the government's credit rating for foreign currency borrowing to AA from AA+, with a negative outlook. It said the territory's creditworthiness was strong but was "at risk of being further eroded."
The reduction is a new blow to Hong Kong officials who are trying to reverse an economic downturn in a major financial and trading center amid anti-government protests that erupted in June. The territory's leader, Chief Executive Carrie Lam, granted a demand by protesters on Thursday by withdrawing a proposed extradition law. But she has rejected other demands, including an independent investigation of complaints of violence by police.
"A degree of public discontent is likely to persist," Fitch said. Hong Kong leaders are trying to shore up economic growth that was weakening before the protests dented the territory's tourism and retail industries.
Fitch said it expects no economic growth this year. That is slightly below the government's forecast in mid-August of 0 to 1%. The previous official forecast was 2% to 3%. In August, the government announced tax cuts and higher social spending.
Instead of financing government spending, most official borrowing is used by the central bank to manage the exchange rate of the Hong Kong dollar, which is linked to the U.S. dollar. The Hong Kong Monetary Authority has "ample resources" of $441 billion in foreign currency reserves to maintain that link, Fitch said.
Fitch also cited Hong Kong's growing integration with the mainland. Hong Kong was promised a "high degree of autonomy" with an independent court system and Western-style civil liberties when the former British colony returned to China in 1997, in a framework called "one country, two systems."
Growing linkages to the Chinese mainland will lead to "greater institutional and regulatory challenges," Fitch said. It said that change was consistent with narrowing the gap between Hong Kong's rating and that of China, which is lower at A+.
Lam disputed the downgrade, saying, "We do not agree with Fitch Rating's decision. Because based on what happened in the past months, nothing has undermined the 'one country, two systems.'"