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Hong Kong Country Risk Report Q4 2016

  • July 2016
  • -
  • Business Monitor International
  • -
  • 41 pages

Core Views

The Hong Kong economy's Q116 downturn is likely to be a harbingerof a further slowdown, and we have therefore downgradedour 2016 real GDP growth forecast for the territory to 1.2%, versus1.7% previously. Our downward revision reflects weaknesses in boththe domestic real estate market, as well as China-related externalheadwinds which will continue to undermine trade activity. We alsonote that the slowdown is likely to continue into 2017, for whichwe have downgraded our real GDP forecast to 1.7%, versus 2.2%previously.The Hong Kong Monetary Authority is unlikely to remove its macroprudentialmeasures targeting the residential real estate marketdespite a significant decline in price levels over recent quarters.With affordability ratios still extremely stretched, both the monetaryauthority and the government will likely hold out for a deeper pricecorrection before making significant adjustments. Meanwhile, wemaintain our forecast for headline inflation to cool to 2.0% by theend of 2016, versus a 2.6% y-o-y print in May.Hong Kong's quadrennial legislative elections in September areunlikely to produce a significantly different government than the onecurrently in power in the city-state, as the failure to achieve universalsuffrage has left intact a hybrid-electoral system that favours the pro-Beijing camp. Meanwhile, Beijing's grip on the city-state will continueto strengthen over the coming years as the Xi administration maintainsa politically conservative line. This will likely entail a further wideningof the gulf between the electorate and the government, which couldhave implications on Hong Kong's long-term social stability outlook.

Table Of Contents

Hong Kong Country Risk Report Q4 2016
Executive Summary. 5
Core Views5
Key Risks..5
Chapter 1: Economic Outlook 7
SWOT Analysis.. 7
BMI Economic Risk Index 7
Economic Growth Outlook. 8
Real Estate Correction, External Conditions Warrant GDP Downgrade8
The Hong Kong economy's Q116 downturn is likely to be a harbinger of things to come, and we have therefore downgraded our 2016
real GDP growth forecast for the territory to 1.2%, versus 1.7% previously. Our downward revision reflects weaknesses in both the
domestic real estate market, as well as China-related external headwinds which will continue to undermine trade activity. We also
note that the slowdown is likely to continue into 2017, for which we have downgrade our real GDP forecast to 1.7%, versus 2.2
%previously.
GDP By Expenditure Outlook 9
TABLE: GDP GROWTH FORECASTS.9
TABLE: PRIVATE CONSUMPTION FORECASTS.9
TABLE: GOVERNMENT CONSUMPTION FORECASTS10
TABLE: FIXED INVESTMENT FORECASTS.10
TABLE: NET EXPORTS FORECASTS..10
Fiscal Policy And Public Debt Outlook 10
Pragmatic Budget To Provide Little In The Way Of Stimulus10
Hong Kong's FY2016/17 fiscal programme aims to provide relief to beleaguered households and small businesses amid the economy's
ongoing economic downturn, and will largely do so via tax reduction measures. However, the pragmatic budget will not be particularly
stimulatory, and we forecast a primary fiscal surplus equivalent to 1.2% of GDP for FY2016/17, versus 1.3% in FY2015/16.
Structural Fiscal Position. 11
TABLE: FISCAL AND PUBLIC DEBT FORECASTS..11
External Trade And Investment Outlook. 12
Trade Woes To Continue, But Overall Position Remains Stable.12
Hong Kong's trade fortunes are unlikely to improve markedly over the coming quarters as the slowdown in the mainland Chinese
economy continues. That said, we note that the territory's overall balance of payments position remains sound, funded by structural
services and FDI surpluses.
Outlook On External Position. 13
TABLE: CURRENT ACCOUNT BALANCE FORECASTS 13
TABLE: TOP 5 GOOD EXPORTS ..14
TABLE: TOP 5 GOODS IMPORTS .14
Monetary Policy.. 15
HKMA To Stay The Course As Property Prices Fall15
The HKMA is unlikely to remove its macroprudential measures targeting the residential real estate market despite a significant decline
in price levels over recent quarters. With affordability ratios still extremely stretched, both the monetary authority and the government
will likely hold out for a deeper price correction before making significant adjustments. Meanwhile, we maintain our forecast for headline
inflation to cool to 2.0% by the end of 2016, versus a 2.6% y-o-y print in May.
Monetary Policy Framework 16
TABLE: MONETARY POLICY FORECASTS.16
Chapter 2: 10-Year Forecast. 19
The Hong Kong Economy To 2025. 19
Mainland Exposure A Double-Edged Sword.19
Hong Kong's long-term outlook remains reasonably bright. While it is 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. However, the mainland linkages represent a double-edged sword, as the long-term structural downtrend in China's real GDP
growth outlook threatens to trap the territory in an extended malaise.
TABLE: LONG-TERM MACROECONOMIC FORECASTS.19
Chapter 3: Political Outlook. 21
SWOT Analysis 21
BMI Political Risk Index. 21
Domestic Politics.. 22
Pro-Beijing Camp To Lose Traction, But Retain Majority.22
Hong Kong's upcoming Legislative Council elections will likely see the ruling pro-Beijing camp lose ground to the pan-democrats,
as sentiment against the former has grown following the government's failure to implement a consensus universal suffrage strategy.
However, the structure of Hong Kong's electoral system favours the pro-Beijing camp, and we believe that the coalition will remain in
power.
TABLE: POLITICAL OVERVIEW .22
Long-Term Political Outlook.. 23
Benign Outlook Despite Rising Social Difficulties23
While we believe Hong Kong will remain at or near the top of our political risk index 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 potential for more large-scale public protests. A lack of affordable housing and rising income inequality could
also pose threats to social stability.
Chapter 4: Operational Risk. 27
SWOT Analysis 27
Operational Risk Index.. 27
Operational Risk 28
TABLE: OPERATIONAL RISK28
Market Size And Utilities .. 29
TABLE: ASIA - MARKET SIZE AND UTILITIES RISK.. 30
Labour Costs .. 32
TABLE: LABOUR REGULATIONS GOVERNING FLEXIBILITY OF WORKFORCE.. 33
Chapter 5: BMI Global Macro Outlook 37
Global Macro Outlook. 37
Brexit Risk Casts A Long Shadow..37
TABLE: GLOBAL ASSUMPTIONS.. 37
TABLE: DEVELOPED STATES, REAL GDP GROWTH, % 38
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %.. 39
TABLE: MACROECONOMIC DATA and FORECASTS.41

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