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Hong Kong Business Forecast Report Q1 2015

  • October 2014
  • -
  • Business Monitor International
  • -
  • 45 pages

Core Views
Hong Kong's economy slowed yet again in Q214, with real GDP growth coming in at a disappointing 1.8% year-on-year (y-o-y). Owing to dual headwinds from China as well as the teetering domestic property market, we have downgraded our 2014 and 2015 real GDP forecasts to 2.5% and 3.3% respectively, from 3.0% and 3.7% previously. We continue to expect the nascent correction in Hong Kong property prices to continue over the course of 2015. However, 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. As cooling measures are withdrawn, this will also hit revenues. However, we expect such measures to remain in place for the time being, and see Hong Kong running a small fiscal surplus in 2015. 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 near-term, as Beijing's model for 2017 elections does not fit with that of Hong Kong's pro-democracy contingent. Following major demonstrations in October 2014, further flare-ups are highly possible.

Table Of Contents

Hong Kong Business Forecast Report Q1 2015
Executive Summary 5
Core Views..5
Key Risks To Outlook..5
Chapter 1: Political Outlook 7
SWOT Analysis. 7
BMI Political Risk Index.. 7
Domestic Politics 8
Occupy Central Losing Steam As Beijing Asserts Will8
Beijing's August decision that candidates for Hong Kong's Chief Executive position will need to be approved by a roughly 1,200-member
committee confirms our view that the city-state is no longer politically autonomous from the mainland. While democracy activists have
carried out large-scale protests over the matter, we believe that the movement will lose momentum over the long-run, and that it will not
seriously undermine long-term commerce or social stability in the country.
TABLE: Political Over view ..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 Index 13
Economic Activity .. 14
Protests A Growing Economic Threat As Beijing Stands Firm14
The rapid escalation in the scale of Hong Kong's pro-democracy protests has surpassed our expectations, and both political and
economic risks in the country have risen as a result. While we expect a largely peaceful outcome, the threat of a further escalation and
the potential for the use of force by Hong Kong law enforcement presents downside risks to our real GDP growth forecast of 2.5% for
TABLE: Economic Activity14
Fiscal Policy 15
Dual Headwinds Elicit GDP Downgrade.15
Hong Kong's economy slowed yet again in Q214, with real GDP growth coming in at a disappointing 1.8% y-o-y. Owing to dual
headwinds from China as well as the teetering domestic property market, we have downgraded our 2014 and 2015 real GDP forecasts
to 2.5% and 3.3% respectively, from 3.0% and 3.7% previously.
TABLE: Fiscal Policy.16
Monetary Policy 17
HKD Stable Despite Political Risks..17
Despite the recent flare in political risk owing to pro-democracy protests, the Hong Kong dollar has remained largely stable, and we do
not expect that the Hong Kong Monetary Authority (HKMA) will need to intervene heavily in the market to maintain the currency's peg.
Meanwhile, we also believe that the HKMA will look to leave its macroprudential measures largely unchanged over the near-term, as
still-buoyant property prices balance out risks of a property correction amid the rising global interest rate environment.
table: Monetary Policy..18
Balance Of Payments 19
Port Outlook Improves Despite Downside Trade Risks19
We have revised up our outlook for throughput at the port of Hong Kong on the back of data for the first four months of 2014. Hong
Kong plays a major role in the global container shipping supply chain but last year a month-long strike, its exposure to the weak demand
outlook for the major consumer markets, increased competition and the move of Chinese manufacturing away from the coast hit the port
hard. The facility lost its coveted position as the world's third-largest container port to Shenzhen.
TABLE: Current Account.19
Chapter 3: 10-Year Forecast. 21
The Hong Kong Economy To 2023. 21
Integration With Mainland Key To Growth21
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 Forecasts21
Chapter 4: Operational Risk. 23
SWOT Analysis.. 23
Operational Risk Index. 23
Operational Risk 24
TABLE: Operational Risk Index..24
Transport Network 25
TABLE: Asia -Tra nsp ort Netw ork Risk 26
Economic Openness.. 29
TABLE: Asia-Economic Openness.29
TABLE: Top 5 Trade Partners-Product Exports (USDmn), 2007-2012. 30
TABLE: Top 5 Products Imported (USDmn), 2007-2012.31
Chapter 5: Key Sectors.. 33
Oil and Gas 33
TABLE: Headline Forecasts..33
Infrastructure.. 34
TABLE: Construction And Infrastructure Industry Data35
TABLE: Construction And Infrastructure Industry Data36
Other Key Sectors 41
Table: Autos Sector Key Indicators.41
Table: Telecoms Sector Key Indicators41
Table: Food and Drink Sector Key Indicators..41
Table: Pharma Sector Key Indicators.42
Table: Freight Key Indicators..42
Chapter 6: BMI Global Assumptions.. 43
Global Outlook 43
Big Emerging Market Revisions.43
Table: Global Assumptions.43
Table : Devel oped States , Real GDP Growt H, %..44
Table : BMI VERSUS BLOO MBERG CON SENSUS REAL GDP GROWTH FORECASTS, %.. 44
Table : Emergi ng Markets , Real GDP Growth , %.45

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