Hong Kong Business Forecast Report Q3 2014

  • April 2014
  • -
  • Business Monitor International
  • -
  • 42 pages

Core Views

T he Hong Kong economy narrowly eclipsed our expectations for 2.8% growth in 2013, notching a 2.9% full-year expansion on the back of 3.0% year-on-year growth in Q413. Nevertheless, we remain decidedly below consensus (3.7%) with our 2014 real GDP forecast of 3.0%, with expectations for the ongoing slowdown in China as well as the nascent correction in the Hong Kong property market to take a toll on broader economic activity.
We continue to expect the nascent correction in Hong Kong property prices to continue over the course of 2014. That said, we maintain that the correction is likely to be relatively mild, with price declines in the range of 10-15% within the realm of possibility. Some upside risk to this forecast will remain in play as long as the city-state's
supply-side woes, including the government missing its land sales targets, continue.

Hong Kong notched another budget surplus in FY2013/14, once again defying government forecasts for a modest deficit of HKD4.9bn. Nevertheless, the government has seen fit to tighten the purse strings in both capital and operating expenditure terms in order to shore up the long-term sustainability of its fiscal accounts. Given the
government's proactive efforts to maintain a solid fiscal trajectory, we believe that Hong Kong will run a small surplus averaging 0.4% of GDP over the next 10 years.
Hong Kong's democratic reform process, the cornerstone of which is meant to entail the introduction of universal suffrage by 2017, remains an issue of considerable contention between pro-Beijing and pro-autonomy interests. On balance, we believe that the Hong Kong government will not be capable of enacting any substantial reforms that are not tacitly approved by Beijing. While this will likely have little effect on Hong Kong's investment or economic outlook, it could nevertheless undermine the city-state's social stability, and we will be closely monitoring the process as such.

Table Of Contents

Hong Kong Business Forecast Report Q3 2014
Executive Summary 5
Core Views 5
Key Risks To Outlook 5
Chapter 1: Political Outlook 7
SWOT Analysis 7
BMI Political Risk Ratings 7
Domestic Politics 8
Beijing Holds The Cards In Reform Negotiations 8
Hong Kong's democratic reform process, the cornerstone of which is meant to entail the introduction of universal suffrage by 2017,
remains an issue of considerable contention between pro-Beijing and pro-autonomy interests. On balance, we believe that the Hong
Kong government will not be capable of enacting any substantial reforms that are not tacitly approved by Beijing. While this will likely
have little effect on Hong Kong's investment or economic outlook, it could nevertheless undermine the city-state's social stability, and we
will be closely monitoring the process as such.
table: Politic al Overview 8
Long-Term Political Outlook 9
Benign Outlook Despite Democratic Reform Uncertainty 9
While we believe Hong Kong will remain at or near the top of our political risk ratings table over the next decade, a number of risks
could lead to rising political instability. The sluggish pace of democratic reforms will continue to cause anger among pro-democracy
supporters, and there is the potential for large-scale public protests. A lack of affordable housing and rising income inequality also could
pose threats to social stability.
Chapter 2: Economic Outlook 13
SWOT Analysis 13
BMI Economic Risk Ratings 13
Economic Activity 14
Solidly Below Consensus On 2014 Growth Outlook 14
The Hong Kong economy scarcely beat our expectations for 2.8% growth in 2013, notching a 2.9% full-year expansion on the back of
3.0% year-on-year growth in Q413. Nevertheless, we remain decidedly below consensus (3.7%) with our 2014 real GDP forecast of
3.0%, with expectations for the ongoing slowdown in China as well as the nascent correction in the Hong Kong property market to take
a toll on broader economic activity.
table: ECONOMIC ACTIVITY 14
Fiscal Policy 15
Proactive Fiscal Policy Presages Long-Term Surplus 15
Hong Kong notched another budget surplus in FY2013/14, once again defying government forecasts for a modest deficit of HKD4.9bn.
Nevertheless, the government has seen fit to tighten the purse strings in both capital and operating expenditure terms in order to shore
up the long-term sustainability of its fiscal accounts. Given the government's proactive efforts to maintain a solid fiscal trajectory, we
believe that Hong Kong will run a small surplus averaging 0.4% of GDP over the next 10 years.
table: FISCAL POLICY 16
Monetary Policy 17
Inflation To Remain Elevated Even As Property Cools 17
Headline inflation cooled somewhat considerably in February, printing at 3.9% year-on-year versus 4.6% previously. Still, this is not
a trend that we expect to continue, particularly as rental price growth is unlikely to retreat substantially even in the face of a mounting
real estate correction. On the whole, we believe that inflation will remain relatively stable over the course of 2014, and are therefore
maintaining our forecast for the category to average 4.0%.
table: MONETARY POLICY 17
Balance Of Payments 18
Increasing Downside Risk To Exports As China Slows 18
Hong Kong's expor ts took a 29.9% month-on-month tumble in February in sympathy with a considerable retrenchment in Chinese
exports. We consider the ongoing slowdown in the mainland's economy to be a downside risk to our 8.2% export growth forecast for
Hong Kong in 2014, but are happy to retain our 3.0% real GDP growth forecast.
table: CURENT ACOUNT 19
Chapter 3: 10-Year Forecast 21
The Hong Kong Economy To 2023 21
Integration With Mainland Key To Growth 21
Hong Kong's long-term outlook remains reasonably bright. While a developed economy, increased cooperation between Hong Kong
and China offers a unique opportunity for the Special Administrat ive Region to benefit from the M ainland to further drive economic
growth. We therefore expect Hong Kong to resume its strong economic expansion over the coming years and average 3.7% real GDP
growth over the next decade. However, Hong Kong needs to maintain its competitive edge or risk being overshadowed by fast-rising
Chinese cities.
table: Long-Term Macroeconomic Forecasts 21
Chapter 4: Business Environment 23
SWOT Analysis 23
BMI Business Environment Risk Ratings 23
Business Environment Outlook 24
Institutions 24
Table: BMI Business And Operation Risk Ratings 24
Table: BMI Legal Framewo rk Rating 25
Infrastructure 26
Table: Labour Force Quality 26
TA BLE : ASIA - ANNUAL FDI INFLOWS 27
Market Orientation 28
Table: Trade And Investment Ratings 28
table: Top Export Destinations 29
Operational Risk 30
Chapter 5: Key Sectors 31
Freight Transport 31
table: Air Freight, 2011-2018 32
table: Maritime Freight, 2011-2018 33
table: Inland Waterway Freigh t, 2011-2018 34
table: Rail Freight, 2011-2018 35
table: Road Freight, 2011-2018 35
Tourism 35
table: Inbound Arrivals, 2011-2018 36
table: Outbound Tourism, 2011-2018 38
Other Key Sectors 39
table: Pharma Sector Key Indicators 39
table: Telecoms Sector Key Indicators 39
table: Infrastructure Sector Key Indicators 39
table: Food and Drink Sector Key Indicators 40
table: Autos Sector Key Indicators 40
Chapter 6: BMI Global Assumptions 41
Global Outlook 41
Chinese Economy Under Pressure 41
Table: Global Assumptions 41
Table: Develop ed States, Real GDP Grow tH, % 42
Table: BMI VER SUS BLOOMBER G CONSENSUS REAL GDP GROWTH FORE CASTS, % 42
Table: Em erging Markets, Real GDP Grow th, % 43

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