Hong Kong Business Forecast Report Q2 2009

Publication Date	March 2009
Publisher	Business Monitor
Product Type	Report
Pages	64
ISBN Number	1745-056X
Product Code	BMI03508

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Summary

A Sharp Recession In 2009

Hong Kong's economy will experience a sharp contraction (-3.6%) in 2009, having entered recession in 2008 after several years of solid growth. We are estimating real GDP growth of 3.1% for 2008, significantly lower than the 6.3% reached in 2007. Hong Kong's position as a major trading hub leaves it particularly vulnerable to the vicissitudes of the global economy, and a recovery is impossible until the US, China, and the European Union pick up. In particular, we are concerned about the services industry, which had held up relatively well in the first three quarters of 2008. With the collapse in global trade, demand (both domestic and external) for trade-related services will be severely curtailed, adding to the woes of the insurance and financial services sector. Overall, Hong Kong's services-oriented economy will have a tough year ahead.

Hong Kong's political system will remain relatively stable with few signs of civil discontent. Given its limited autonomy and the fact that the territory is ultimately under the control of China, political reforms will likely take a backseat amid the economic crisis. Indeed, a recent announcement by Chief Executive Donald Tsang about the delay in public consultation on political reforms appears to support this outlook. While this has raised the ire of pro-democracy lawmakers, we believe that economic problems should stay at the forefront of public concerns, with progress towards achieving universal suffrage slipping down the list of priorities.

An expansionary budget has already been implemented for FY2008/09 (April-March) as the government moved to pre-empt the deteriorating economic situation. With the economy already in a recession and the Base Rate at just 0.50%, the government is expected to continue its expansionary fiscal policy. This will mean a further widening of the budget deficit for FY2009/10 as tax revenues fall. However, this should not be too much of a concern as the government has sufficient fiscal reserves built up over the last few years to fund the additional spending.

Hong Kong continues to offer one of the most competitive business environments in the world with its low tax rates, good infrastructure and developed institutions. Although it will not be able to escape the current maelstrom troubling all economies, it is in a relatively good position to catch the next upturn. Notably, this is a chance for Hong Kong to boost co-operation with China. Indeed, the recently unveiled plan for the development and reform planning of the Pearl River Delta Region (the region in southern China encompassing Hong Kong, Macau and Guangdong province) provides an ideal long-term opportunity for Hong Kong to benefit further from China's growth.

Content

Executive Summary
- A Sharp Recession In 2009
Chapter 1: Political Outlook
- SWOT Analysis
- BMI Political Risk Ratings
- Domestic Politics
- Political Reforms To Take A Backseat
- We expect economic concerns to come to the forefront in 2009, meaning less momentum for political reform in the near term.
Chapter 2: Economic Outlook
- SWOT Analysis
- BMI Economic Risk Ratings
- Economic Activity
- A Deep Recession In 2009
- With global economic headwinds continuing to gather at an alarming pace, Hong Kong's economy looks set to be buffeted
- more violently than initially anticipated.
- Fiscal Policy
- Budget Deficit To Widen Sharply In 2009
- Hong Kong's budget deficit will widen sharply in FY2009/10 (April-March), as expenditures remain robust due to more
- measures to prop up employment, while revenues are expected to decline.
- Monetary Policy
- Time For Unconventional Monetary Policy
- The Hong Kong Monetary Authority (HKMA) continued to cut rates aggressively in Q408, mimicking the aggressive easing
- conducted by the US Federal Reserve.
- Balance Of Payments
- Balance Of Payments Position To Weaken Significantly
- Hong Kong's balance of payments surplus will be eroded over the coming year as global trade stalls, leading to sharp falls
- in external demand for services.
Chapter 3: 10-Year Forecast
- The Hong Kong Economy To 2018
- Integration With Mainland Key To Growth
- Hong Kong's long-term outlook remains reasonably bright.
Chapter 4: Special Report
- China
- A Seismic Upheaval In 2009?
- One of the biggest - and least discussed - 'wild cards' that could rear its head in 2009 is dramatic political upheaval in China.
- United States
- Europe
- Big Trouble For European Banks In 2009
- The deteriorating global macroeconomic outlook, high levels of leverage, and a broken business model will combine to spell
- trouble for the financial services sector in 2009.
Chapter 5: Business Environment
- SWOT Analysis
- BMI Business Environment Risk Ratings
- Business Environment Outlook
- Institutions
- Infrastructure
- Market Orientation
- Operational Risk
Chapter 6: Key Sectors
- IT
- Infrastructure
- Executive Summary
- Hong Kong's annual real GDP growth slowed markedly in Q208, to 4.2% from 7.3% in Q108.
Chapter 7: BMI Global Assumptions
- Global
- Economic Activity
- Monetary Policy
- Commodities
List of Tables
- Table: Hong Kong Political Overview
- Table: ECONOMIC ACTIVITY
- Table: FISCAL POLICY
- Table: MONETARY POLICY
- Table: BALANCE OF PAYMENTS
- Table: Long-Term Macroeconomic Forecasts
- Table: Banks' Leverage Ratios
- Table: Assets As % of Home Country GDP
- Table: Assets As % of Home Country GDP When Eurozone Is Considered 'Home Country '
- Table: Exposure As % of Total Exposure To Region
- Table: Banks' Foreign Exposure (US$ mn)
- Table: Exposure As % of National GDP
- Table: BMI BUSINESS & OPERATIONAL RISK RATINGS
- Table: BMI LEGAL FRAMEWORK RATINGS
- Table: Asia, FDI Annual Inflows
- Table: BMI TRADE RATINGS
- Table: HONG KONG TOP EXPORT DESTINATIONS
- Table: Hong Kong's IT Industry (US$mn, unless otherwise stated)
- Table: Economic And Construction Data Table
- Table: Global Assumptions
- Table: GLO BAL & REGIONAL REAL GDP GROWTH, % chg y-o-y
- Table: Developed States, Real GDP Growth Forecasts
- Table: Emerging Markets, Real GDP Growth Forecasts
- Table: DEVELO PED MARKET EXCHANGE RATES
- Table: EMERGING MARKET EXCHANGE RATES