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Hong Kong Country Risk Report Q2 2016

Hong Kong Country Risk Report Q2 2016

Core Views

Hong Kong's economy narrowly beat consensus expectations in Q315,despite myriad domestic and external drags on growth. However, the2.3% print confirms our expectations for the city-state's economicexpansion to cool in line with a stumbling mainland economy, andcorroborates our full-year real GDP growth forecast of 2.5% for 2015.

Tepid external conditions and the rising propensity for a domesticproperty price correction will continue to weigh on the economy in2016, and we have therefore marginally downgraded our real GDPforecast to 2.3% for 2016, from 2.5% previously.

Hong Kong's residential property market is at a tipping point, and acorrection appears ready to take hold in 2016 as supply constraintsfade and interest rates rise. At the same time, affordability is extremelystretched relative to median household incomes, and we believethat the confluence of these factors spell a difficult outlook for theproperty sector over the coming years. This will hit both constructionactivity as well as the financial services sector in the country. Thatsaid, we do not foresee an acute correction taking hold in 2016, andinstead expect moderate price declines.

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 thepro-Beijing camp. Meanwhile, Beijing's grip on the city-state willcontinue to strengthen over the coming years as the Xi administrationmaintains a politically conservative line.


Executive Summary
Core Views
Key Risks
Chapter 1: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Growth Outlook
Tepid Growth Outlook Following Q315 Slowdown
The Hong Kong economy's Q315 moderation (with real GDP growth falling to 2.3% y-o-y, from 2.8% previously) underscores our
expectations for the city-state to experience tepid growth in line with the Chinese economy's slowdown and an impending residential
real estate correction. As such, we retain our expectations for real GDP growth to come in at 2.5% in 2015, before falling slightly to 2.3
%in 2016.
GDP By Expenditure Outlook
TABLE: GDP GROWTH FORECASTS
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE: GOVERNMENT CONSUMPTION FORECASTS
TABLE: FIXED INVESTMENT FORECASTS
TABLE: NET EXPORTS FORECASTS
Fiscal Policy And Public Debt Outlook
Revenue-Boosting Measures Set To Stem Structural Headwinds
Hong Kong officials have indicated that revenue-boosting measures will be inevitable as the population ages and economic growth
slows, and we believe that marginal income tax rates or higher taxes on luxury transactions could be on the table over the coming years.
The officials' recognition of long-term fiscal challenges at a time when the country is running a consistent fiscal surplus underscores the
sustainable nature of Hong Kong's fiscal profile, and we forecast an average surplus of 2.1% per annum through 2021.
Structural Fiscal Position
External Trade And Investment Outlook
Global Trade Woes Paint Mediocre Growth Picture
Hong Kong's trade outlook remains poor over the near-future, as its close trade links with the mainland will undermine the potential for a
recovery in 2016. Meanwhile, the global trade outlook is scarcely better for the upcoming year, with middling growth outlooks in the US, EU,
and Japan, among others. We expect nominal export and import growth to come in at a muted pace of just 0.2% and 0.5%, respectively,
in 2016.
Outlook On External Position
TABLE: TOP FIVE GOODS EXPORT DESTINATIONS (2015)
TABLE: TOP FIVE GOODS IMPORT SOURCES (2015)
Monetary Policy
HKMA To Stand Pat As Property Prices Hit Inflection Point
Hong Kong's inflation rate has moderated over recent months, and we expect a nascent residential property price correction to weigh on
price growth further in 2016. As a result, we have lowered our 2016 end-year headline inflation forecast to 2.0%, from 3.0% previously.
Extremely rich valuations, enduring macroprudential cooling measures, rising interest rates, and a continued deterioration in the
Chinese economy underpin our expectations for a residential property price correction of 10-15% over the coming years.
Monetary Policy Framework
Chapter 2: 10-Year Forecast
The Hong Kong Economy To 2025
Integration With Mainland Key To Growth
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 3.6% real GDP
growth over the next decade.
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Chapter 3: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
2016 Elections Unlikely To Yield Significant Change
Hong Kong's quadrennial legislative elections in September are unlikely to produce a significantly different government than the one
currently in power in the city-state, as the failure to achieve universal suffrage has left intact a hybrid-electoral system that favours the
pro-Beijing camp. Meanwhile, Beijing's grip on the city-state will continue to strengthen over the coming years as the Xi administration
maintains a politically conservative line.
TABLE: POLITICAL OVERVIEW
Long-Term Political Outlook
Benign Outlook Despite Democratic Reform Difficulties
While we believe Hong Kong will remain at or near the top of our Political Risk Index 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 more large-scale public protests. A lack of affordable housing and rising income inequality also could pose
threats to social stability.
Chapter 4: Operational Risk
SWOT Analysis
Operational Risk Index
Operational Risk
TABLE: OPERATIONAL RISK
Trade Procedures And Governance
TABLE: EXPORT & IMPORT DOCUMENTS
TABLE: TRADE PROCEDURES BREAKDOWN
Vulnerability To Crime
TABLE: ASIA – TRADE PROCEDURES AND GOVERNANCE RISK
Chapter 5: BMI Global Macro Outlook
Global Macro Outlook
Unfinished Business In 2016
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %
TABLE: HONG KONG – MACROECONOMIC DATA & FORECASTS

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