Hong Kong: Risk Assessment
Country Risk Rating
Business Climate Rating
- Open economy
- High-quality infrastructure
- Top-class global financial centre, airlock between China and the rest of the world
- Healthy banking system
- Anchoring of the currency to the US dollar
- Robust institutional quality and judicial system thanks to the “one country, two systems” principle
- Lack of innovation and diversification of the economy
- Exposure to slowdown in mainland China
- Mismatch between business cycles in the United States and China, as the HKD is pegged to the USD
- Real estate sector risks and housing affordability
- Rising income inequality and social discontent
- Industry has fully relocated to mainland China
Recessionary pressures will extend into H1 2020
Growth contraction is expected to continue at least into the first half of 2020. The trade war between the US and China has impacted exports, which represent over 190% of Hong Kong’s GDP, the majority of which are re-exports from mainland China. In addition, private consumption, which accounts for more than 65% of GDP, has suffered because of protracted social unrest in Hong Kong. This has ensued several months of protests, resulting in a double-digit contraction in retail sales that will continue in 2020. The service sector is also dependent on tourism revenues, which declined by -30% year on year in the second half of 2019, led by fewer Chinese tourist arrivals (75% of total). Inflation remains low and the labour market tight (unemployment rate around 2.5%). This should spur real wage growth under normal conditions, but unemployment is set to increase in 2020 in the service and retail sectors, while inflation will likely tick up slightly on higher food prices, 90% of which is imported from abroad.
Investment growth (21% of GDP) might stall on the back of weaker sentiment stemming from the trade war and ongoing protests. Credit conditions have turned more favourable, in line with three interest rate cuts by the U.S. Federal Reserve (Fed). Hong Kong has a currency board so the Hong Kong Monetary Authority (HKMA) follows monetary policy directions from the Fed. However, excess liquidity in order to avoid downside pressures on the housing market has translated into limited transmission of the three rate cuts in 2019. As a result, housing prices may correct further in 2020, which will drag further on consumption through the wealth effects. Public investment will improve, but this will only be marginal, as a number of large-scale infrastructure projects (fast speed rail to Guangzhou and the Hong Kong-Zhuhai-Macao Bridge), were completed in 2019. The government announced fiscal stimulus measures, worth USD 2.5 billion or roughly 2% of GDP. However, these constitute one-off sweeteners that will not prevent the economy from contracting further in the first half of 2020. Growth will bottom-out in the second half of 2020, even if no resolution to social unrest has been reached, on a favourable base effect.
First budget deficit since 2004, financial services remain strong
Hong Kong will register its first budget deficit, since the SARS outbreak of 2003, in the financial year ending March 2020. The main reasons include adverse economic conditions, decreased tax revenues, lower land sale income and relief measures announced during the year. A small deficit is not a serious concern in view of large reserves, representing above 20 months of expenditure. Even if spending increases, revenues from land and property sales should remain positive, provided the correction in housing prices is mild and in case the government decides to sell more stockpiles. The merchandise trade balance will deteriorate slightly, as exports contract faster than imports, but the current account balance will remain in surplus, thanks to the significance of resident and local firms’ foreign income repatriation.
In contrast to the retail sector, and notwithstanding pressures on the capital outflow front, financial services will remain dynamic. Bank balance sheets remain strong, thanks to household debt limits and regular stress tests performed by the HKMA. In addition, Hong Kong is a top global Initial Public Offering (IPO) centre and the largest financial hub in the region, with assets under management (AUMs) far exceeding those of regional competitors Singapore and Tokyo.
Tougher times ahead for the Chief Executive
Chief Executive Carrie Lam’s pro-Beijing establishment coalition lost a ruling majority in the Legislative Council (Legco) in 2019. Carrie Lam’s popularity has plummeted over the unpopular extradition bill, citizenry concerns over alleged police brutality and corruption allegations surrounding her unpopular “Lantau Tomorrow Vision”. Beijing will likely pressure the Hong Kong government into implementing changes to the school curriculum to include more “patriotic education”, a move that risks exacerbating social unrest even further. To manage discontent, the Hong Kong government will continue to target funds at youth programs and will make a genuine effort to increase the availability of social housing, both of which are good first steps in dealing with high levels of income inequality. The US passed its Hong Kong Human Rights Bill on November 2019, which poses threats to the outlook of Hong Kong in case the US Senate reverses Hong Kong’s preferential status.