Country Report Hong Kong February 2009

Summary

Hong Kong's chief executive, Donald Tsang, is becoming increasingly unpopular. Although he remains safe in his position, the Chinese government is growing concerned that unrest will increase as the recession deepens.
China’s decision in December 2007 not to permit full direct elections for the post of chief executive before 2017 or for the Legislative Council (Legco) before 2020 will limit the options for political reform available to Mr Tsang.
As revenue streams weaken and government spending increases to support economic growth, the fiscal deficit will grow. The fiscal deficit will average 3.7% of GDP in 2009-10.
The Economist Intelligence Unit expects real GDP to contract by 4.7% in 2009. The main cause of the contraction is a reduction in export volumes, which in turn will lead to a weaker job market that will undermine consumption.
Hong Kong’s current-account surplus will remain substantial. Slowing export growth will be offset by weaker import expansion, and the services surplus will remain huge.
Consumer price inflation is forecast to slow to 1.1% in 2009, down from an estimated 4.3% in 2008. Falling food prices and weak domestic demand will be the two main factors suppressing inflation in 2009.

Donald Tsang appointed five new members to the Executive Council (Exco, the territory’s cabinet) on January 21st. A number of the new members are candidates who support pro-China political parties.
The sharp economic downturn in Hong Kong has led the government to delay the public consultation on political reform that was to have started in early 2009. The consultation will now be held at the end of the year.
The Exchange Fund recorded investment losses of HK$81bn (US$10.4bn) in 2008, equivalent to 5.6% of the fund's total assets. Despite the loss, the fund has enough resources to support the value of the Hong Kong dollar.
Amid the sharp economic downturn, the government's fiscal position has deteriorated markedly. Deficits of HK$15.1bn and HK$33.2bn were recorded in April-June and July-September respectively.
Economic activity is continuing to fall. Retail sales fell by 2.8% year on year in November, reflecting weak consumer confidence, while the value of merchandise exports contracted by 11.4% year on year in December.