Bangkok--26 Feb--Standard & Poor's
Standard & Poor's Ratings Services expects the Hong Kong government's creditworthiness will weaken as a result of expected near-term fiscal developments. We project Hong Kong's real GDP growth in 2009 at negative 2.5%. This will lower government income sharply while increasing the need for countercyclical spending. A significantly weaker budget outcome is inevitable. Despite this, Standard & Poor's opinion is that the likelihood of a negative credit rating change is modest and the outlook on the long-term ratings remains stable.
The Hong Kong government (AA+/Stable/A-1+) today announced that it expects a large Hong Kong dollar (HK$) 39.9 billion (2.4% of GDP) consolidated deficit for fiscal year 2009. This follows a smaller deficit of HK$4.9 billion (0.3% of GDP) estimated for fiscal 2008.
The government's reliance on a narrow tax base is a key reason for the sharp fiscal balance deterioration. This longstanding weakness of the Hong Kong fiscal system subjects government revenue to large cyclical fluctuations. This volatility is only partially mitigated by the recent change in the computation of investment income that the government derives from the Exchange Fund.
Hong Kong's sizeable fiscal reserves, augmented by the strong budgetary performance of recent years, limit the damage to its fiscal profile. Despite the expected deficit, the government projects that the fiscal reserves will likely remain at HK$448.1 billion at the end of fiscal 2009. This is sufficient to cover 18 months of expenditure and offers the government significant financial flexibility in the next few years.
The government has stated its intention to return the operating account to a surplus position by fiscal 2012 and to bring the consolidated account close to balance by fiscal 2013 in its medium-term forecast. These are credible projections, in our view. The government has not introduced major changes to the fiscal structure that could hinder a revenue rebound when the economy recovers. Moreover, it has a track record of successfully controlling costs to restore fiscal balance in the years after the outbreak of Severe Acute Respiratory Syndrome in 2003.
However, this benign outlook hinges importantly on an expected robust economic recovery after a relatively mild recession for Hong Kong in 2009. Economic uncertainty is unusually high at this time and the global slump has the potential to drag on. A prolonged period of economic weakness will intensify the pressure on Hong Kong's public finances and increase the likelihood of a downward movement to the credit rating on the Hong Kong government.
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