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Hong Kong Business Forecast Report Q4 2014

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

Core Views
We continue to hold a below consensus forecast for Hong Kong's real economic growth in 2014 at 3.0%. Indeed, Q114's weak real GDP growth print of 2.5% year-on-year (y-o-y) raised the downside risks to this forecast, as investment and private consumption growth faltered, and we may look to downgrade the full-year figure in the event that Q214 also surprises to the downside. We continue to expect the nascent correction in Hong Kong property prices to continue over the course of 2014. Still, 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, although the rising likelihood of monetary tightening in the US in 2015 is clouding the medium-term outlook.

While Hong Kong's fiscal position remains on a sound footing, the potential for a normalisation of interest rates in the US could pose a challenge to the government. On the one hand, government revenues will be hit by the subsequent fall in property prices in the city-state. At the same time, it will likely move to rein in recent stamp duty
measures, which will also be a drag on short-term fiscal revenues. Hong Kong's democratic reform process, the cornerstone of which is meant to entail the introduction of universal suffrage by 2017, has become an increasingly contentious issue over recent months. We do not expect a satisfactory solution to the process in the nearterm,
as Beijing's interests are directly counter to the interests of the pro-democracy camp in Hong Kong. Over the long run, we see little scope for significantly enhanced democratic rights in Hong Kong.

Table Of Contents

Hong Kong Business Forecast Report Q4 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 Asserting Mandate As 'Occupy Central' Grows8
The massive turnout for 'Occupy Central's' unofficial referendum on Hong Kong's electoral system is indicative of public discontent
with a controversial white paper issued earlier in June by Beijing. However, we continue to believe that Beijing's influence over Hong
Kong's political system will only continue to expand over the coming years, and find it unlikely that popular resistance in Hong Kong
will sway the Chinese Communist Party. As such, we have downgraded Hong Kong's short-term political risk rating to 84.0 from 84.8
previously.
table: Political 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
Downbeat Q114 GDP Print Highlights Growth Risks...14
Hong Kong real GDP growth fell to 2.5% in Q114, failing to hit consensus estimates for a 3.0% performance as investment and
private consumption growth faltered. While we do not yet see cause to downgrade our headline GDP forecast of 3.0% for 2014, we
nevertheless note that risks to private consumption and investment are salient.
table: Economic Activity....14
Fiscal Policy . 15
Fiscal Position Sound Despite Looming Challenges...15
Hong Kong's fiscal accounts will remain relatively in balance over the medium -term owing to the government's diverse revenue base.
However, the elevated property prices in the city-state pose a challenge, as the impending normalisation of monetary policy in the US
will likely necessitate a rolling back of the government's stamp duty programme, thereby taking a bite out of a growing source of fiscal
revenues.
table: Fiscal Policy....16
Monetary Policy 16
Inflation, PMI Reflect Cooling Economy...16
Both headline inflation as well as the broad purchasing managers' index (PMI) continued their declines in April, to 3.7% y-o-y and
49.7, respectively. Going forward, we see some downside risk to our revised average inflation forecast for 2014 (3.7%, versus 4.0
%previously) as the property market continues to cool, while we retain our cautious outlook on the city-state's trade fortunes.
table: Monetary Policy.17
Balance Of Payments . 18
Trade Prospects Unchanged Despite Mainland Improvement..18
Recent trade data from Hong Kong have coincided with stronger data out of mainland China, reinforcing the view that the Chinese
economy is in the midst of a pick-up in economic activity. However, given our expectations for this pick-up to be transitory in nature, we
continue to believe that risks to our 2014 (6.3%) and 2015 (5.7%) merchandise export growth forecasts for Hong Kong are weighted to
the downside.
table: Current Account18
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 Administrative Region to benefit from the mainland 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 Framework Rating...25
Infrastructure 26
Tab le: Labour Forc e Qua lit y.26
TABLE: ASIA - ANNUAL FDI INFLOWS27
Market Orientation.. 28
Table: Trade And Investment Ratings....28
tab le: Top Export Desti natio ns (USDMN)...29
Operational Risk 30
Chapter 5: Key Sectors.. 31
Pharmaceuticals and Healthcare .. 31
table: Private Healthcare Expenditure Trends, Historical Data And Forecasts .. 32
table: Pharmaceutical Sales, Historical Data And Forecasts32
table: Government Healthcare Expenditure Trends, Historical Data And Forecasts... 33
table: Healthcare Expenditure Trends, Historical Data And Forecasts .... 33
Telecommunications... 34
table: Telecoms Sector - Mobile - Historical Data and Forecasts. 35
table: Telecoms Sector - Wireline - Historical Data and Forecasts . 36
Other Key Sectors.. 39
table: Oil and Gas Sector Key Indicators.39
table: Infrastructure Sector Key Indicators.39
table: Food and Drink Sector Key Indicators...39
table: Autos Sector Key Indicators.40
table: Freight Key Indicators....40
Chapter 6: BMI Global Assumptions. 41
Global Outlook... 41
Global Recovery Still On Track..41
Table: Global Assumptions....41
Table: Developed States, Real GDP GrowtH, %.42
Table: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %.. 42
Table: Emerging Markets, Real GDP Growth, %43

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