Hong Kong’s Mandatory Provident Fund Schemes Authority (MPFA) instructed the city’s fund managers last month to prepare for possible fallout from Moody’s
recent reduction of its US Treasury debt rating from Aaa to Aa1.
The territory’s mandatory provident funds (MPFs)—Hong Kong’s compulsory retirement savings schemes—are val- ued at approximately $167 billion, of which about 37% were invested in bonds and balanced funds as of the close of last year. Participating fund managers may be compelled to sell some of their US government bonds due to Washington’s
loss of its triple-A rating. Specifically, the MPFA told managers and MPF trustees to prepare for the possibility that the remaining credit agencies may slash US government debt ratings. The regulator asked trustees to devise adequate strategies and risk mitigation methods should US bond ratings fall further, as the MPFA has no plans to alter existing investment requirements.
The responsibility lies with MPF investment managers to create sound compliance plans, the regulator emphasized—and to make prompt, coherent changes to their asset allocation when respond- ing to market events, while at all times acting in the best interests of MPF scheme members
Moody’s mid-May decision to downgrade US sovereign debt stemmed from the growing cost of rolling over existing debt amid high interest rates alongside the steep rise in the federal government’s budget deficit. The one-notch downgrade reflected a decade’s growth in interest payment ratios and government debt to levels markedly greater than similarly rated sovereigns, Moody’s said in a statement.
Also, as of late May, Moody’s and S&P Global maintained their respective Aa3 and AA+ credit ratings for Hong Kong. Both agencies said the special administrative region’s position was largely secure on the back of its sizable foreign exchange reserves and fiscal buffers, coupled with high per capita income levels and the territory’s robust external balance sheet.
