Preventive measures: Monetary Authority Chief Executive Joseph Yam says banks need to pay particular attention to liquidity management and the risks arising from increased market volatility.

Hong Kong enjoyed AA ratings, its highest ever, at the end of last year, Monetary Authority Chief Executive Joseph Yam says. He firmly believes Hong Kong, with

strong economic fundamentals and fiscal position, belongs among the world's triple-A economies.

In the authority's latest annual report, Mr Yam said better sovereign ratings lower the costs of funding for local debt issuers and help raise market confidence in the Linked Exchange Rate system and monetary stability, which in turn helps underpin economic growth.

"The HKMA was heavily involved during the year, with the Government, in making the case to the international credit-rating agencies that Hong Kong's strong economic fundamentals and fiscal position merit higher ratings. We firmly believe that Hong Kong belongs among the world's triple-A economies and we will continue to argue for improvements to our ratings," he added.

He said last year was an interesting and challenging year for the authority. And yet, against this difficult background, the Exchange Fund achieved record investment income of $142.2 billion. The Hong Kong dollar and the local banking sector remained stable despite the market turbulence.

Mr Yam cautioned that volatility and turbulence have continued into 2008, making the investment environment for this year uncertain at best. Hong Kong people also need to be alert to any increase in the inflation rate this year.

Sub-prime woes affect Asia

Noting the Hong Kong banking sector could not escape entirely the effects of the subprime crisis that began in the US in last August, he said some local institutions saw their profits adversely affected by exposure to sub-prime assets.

"Fortunately, the strong financial and liquidity positions of the sector as a whole provide a substantial cushion against any further problems in the global system, and I am sure the banks will exercise their customary prudence. But the world is an uncertain place, and in 2008 banks will need to pay particular attention to liquidity management and the risks arising from increased market volatility," Mr Yam added.

The authority appointed a consultant at the end of last year to review how it can best fulfil its responsibilities in the area of ensuring banking stability. The consultant will make recommendations later this year, after consulting widely with the industry and the community.