Hong Kong Country Risk Report

Published 28 January 2015 | Quarterly

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Hong Kong Country Risk Report

Hong Kong

Core Views

  • Hong Kong's real economic growth slowed to 2.3% in 2014, versus 2.9% in 2013. While we still envisage a modest growth rebound to 2.7% in 2015, dual headwinds from China as well as the overvalued domestic property market provide downside risks to this forecast.

  • We expect the ongoing run-up in Hong Kong residential property prices to fade in 2015, particularly as supply limitations subside and interest rates increase. However, the eventual correction is likely to be relatively mild, with price declines in the range of 10-15% within the realm of possibility.

  • Extremely large-scale pro-democracy protests, which began in September 2014 and were only wound up in December, failed to bring about any significant political compromise from either the Hong Kong or Chinese governments. While there remains potential for similar protests in the future, we do not believe that Beijing is likely to give in to popular sentiment. As such, our expectations for meaningful democratic reform in Hong Kong remain limited.

Key Risk To Outlook

  • The main downside risk to the Hong Kong economy continues to stem from China. Should the ongoing economic slowdown in China hit crisis levels, Hong Kong would not be unscathed, and real GDP growth would likely fall short of even our below consensus forecast. Likewise, should the People's Bank of China (PBoC) opt to gradually devalue the Chinese yuan (which we continue to note as a risk to our core CNY forecast), this would put pressure on the HKMA to re-peg the Hong Kong dollar.

Macroeconomic Forecasts (Hong Kong 2013-2016)
Indicator 2013 2014e 2015f 2016f
BMI/Census and Statistics Department
Nominal GDP, USDbn 274.8 289.6 309.4 331.0
Real GDP growth, % y-o-y 2.9 2.3 2.7 3.6
Consumer price inflation, % y-o-y, eop 4.3 4.9 3.5 3.0
Exchange rate HKD/USD, eop 7.75 7.76 7.77 7.77
Budget balance, % of GDP 0.6 0.8 0.4

Table of Contents

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
Protests On The Wane Despite Lack Of Progress
8
Hong Kong's pro-democracy protests have wound down considerably, and we believe that they will continue to shrink over the nearterm
However, given that it is unlikely that Hong Kong's still-significant pro-democracy contingent will be able to come to a satisfactory
However, given that it is unlikely that Hong Kong's still-significant pro-democracy contingent will be able to come to a satisfactory
agreement with the government, the potential for future incidences of mass protest will remain
TABLE: Political Overview
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 index table over the next decade, a number of risks
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 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 2: Economic Outlook
13
SWOT Analysis
13
BMI Economic Risk Index
13
Economic Activity
14
Contraction Avoided, But Downside Risks Remain Prescient
14
The Hong Kong economy managed to avoid contraction in Q314 despite mass protests in key commercial districts, expanding by 2
7%
y-o-y
3% is on the cards for 2015, we note that downside risks
stemming from the mainland's economic slowdown remain prescient
TABLE: Economic Activity
14
Fiscal Policy
15
Private Healthcare Sector To Play A Bigger Role
15
The Hong Kong government will continue to shift healthcare provision towards the private sector due to the growing financial strain and
The Hong Kong government will continue to shift healthcare provision towards the private sector due to the growing financial strain and
an overburdened public healthcare system
Given the government's proactive efforts in maintaining a relatively balanced fiscal agenda,
we maintain our expectations for Hong Kong's fiscal balance to average a small surplus equivalent to 0
4% of GDP per annum through
2020
TABLE: Fiscal Policy
15
Monetary Policy
16
HKMA To Keep Policy Steady Amid Likely Property Correction
16
Hong Kong's headline inflation rate has bucked the regional disinflationary trend, posting at 5
That said, we
see room for inflation to retreat over the coming quarters, particularly with housing inflation set to decline in line with our expectations for
see room for inflation to retreat over the coming quarters, particularly with housing inflation set to decline in line with our expectations for
a property market correction
TABLE: Monetary Policy
17
Balance Of Payments
18
Mainland Slowdown Clouds Trade Outlook
18
Hong Kong's trade outlook, which is closely tied with that of China, has declined over recent months in line with falling growth
Hong Kong's trade outlook, which is closely tied with that of China, has declined over recent months in line with falling growth
momentum in the mainland
6%, respectively, for 2015, we note
that risks to these forecasts are to the downside as a result of poor economic growth outlooks in large demand centres including the
that risks to these forecasts are to the downside as a result of poor economic growth outlooks in large demand centres including the
eurozone and Japan
TABLE: Curent Account
18
Chapter 3: 10-Year Forecast
21
The Hong Kong Economy To 2024
21
Integration With Mainland Key To Growth
21
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
and China offers a unique opportunity for the Special Administrative Region to benefit from the Mainland to further drive economic
growth
8% 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 Forecasts
21
Chapter 4: Operational Risk
23
SWOT Analysis
23
Operational Risk Index
23
Operational Risk
24
TABLE: Operational Risk Index
24
Availability Of Labour
25
TABLE: Asia - Availability Of Labour Risk
26
TABLE: Top 10 Source Countries For Migrant Workers
27
TABLE: Labour Force Employment By Sector (-000),
28
Crime Risk
29
TABLE: Asia - Criminal Risk
30
TABLE: Crime Statistics
31
Chapter 5: Key Sectors
33
Autos
33
TABLE: Autos Total Market - Historical Data And Forecasts
33
TABLE: Pasenger Car Market - Historical Data And Forecasts
34
TABLE: Commercial Vehicle Market - Historical Data And Forecasts
34
TABLE: Motorcycle Market - Historical Data And Forecasts
35
TABLE: Ex-Gratia Payment Scheme
35
Food & Drink
36
TABLE: Food Consumption Indicators - Historical Data & Forecasts
38
TABLE: Alcoholic Drinks Value/Volume Sales, Production & Trade - Historical Data & Forecasts
40
TABLE: Mas Grocery Retail Sales By Format - Historical Data & Forecasts
41
Other Key Sectors
43
TABLE: Oil and Gas Sector Key Indicators
43
TABLE: Pharma Sector Key Indicators
43
TABLE: Telecoms Sector Key Indicators
44
TABLE: Infrastructure Sector Key Indicators
44
TABLE: Freight Key Indicators
44
Chapter 6: BMI Global Assumptions
45
Global Outlook
45
New Era For Oil
45
Table: Global Assumptions
45
Table: Developed States, Real GDP GrowtH, %
46
Table: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
46
Table: Emerging Markets, Real GDP Growth, %
47

The Hong Kong Country Risk Report helps businesses with market assessment, strategic planning and decision making to promote growth and profitability in Hong Kong. It is an essential tool for CEOs, Chairmen, Finance Directors/CFOs, Managing Directors, Marketing/Sales Directors with commercial interests in this emerging market.

An influential new analysis of Hong Kong's economic, political and financial prospects through end-2019, just published by award-winning forecasters, Business Monitor International (BMI).

Key Uses

  • Forecast the pace and stability of Hong Kong's economic and industry growth through end-2019.
  • Identify and evaluate adverse political and economic trends, to facilitate risk mitigation.
  • Assess the critical shortcomings of the operating environment that pose hidden barriers and costs to corporate profitability.
  • Contextualise Hong Kong's country risks against regional peers using BMI's country comparative Risk Index system.
  • Evaluate external threats to doing business in Hong Kong, including currency volatility, the commodity price boom and protectionist policies.

The Hong Kong Country Risk Report by Business Monitor International (BMI) includes four major sections: Economic Outlook, Political Outlook, Operational Risk and Key Sector Outlook.

Economic Outlook:

How will the Hong Kong' economic policy-making and performance impact on corporate profitability over 2015-2019?

BMI provides our fully independent 5-year forecasts for Hong Kong through end-2019 for more than 50 economic and key industry indicators. We evaluate growth, and also forecast the impact of economic management.

Economic Outlook Contents

The Hong Kong Country Risk Report features BMI's forecasts with supporting analysis for 2015 through to end-2019, set against government views and BMI's evaluation of global and regional prospects.

Key Areas Covered:

Data:

  • Full 10-year forecasts with data - for key macroeconomic variables including GDP (real growth and per capita), population, inflation, current account balance and the exchange rate.
  • BMI's comprehensive Risk Index system - rates each country worldwide for economic and political risk, and rates the business environment, within a global and regional context.

Written Analysis:

  • Economic Activity - real GDP growth, employment, inflation, consumption (retail sales and confidence).
  • Balance of Payments - trade and investment, current and capital account.
  • Monetary Policy - interest rate trends (bank lending and deposit rates) and inflation (producer price and consumer price).
  • Exchange Rate Policy - currency controls, foreign investment flows, exchange rates and foreign exchange reserves.
  • Fiscal Policy - macroeconomic strategy and policies, government finance and tax reforms.
  • Foreign Direct Investment - approvals, inflows and climate.
  • External Debt - debt profile (short and long-term plus public and private sector obligations).
  • Global Assumptions - forecasts for each year to end-2019 covering: major commodities, growth in key regions, inflation, and interest and exchange rates, in the United States, Japan, China and the eurozone.

Key Benefits

  • Rely upon BMI's 100% independent forecast scenarios for Hong Kong and underlying assumptions - we take no advertising and are privately-owned.
  • Exploit the benefits of BMI's comprehensive and reliable macroeconomic database on Hong Kong, sourced and fully maintained by BMI from an extensive network of private sector, government and multilateral contacts.
  • Gain key insights into the current and future direction of government economic policy, which could significantly affect your company's business prospects, from BMI's team of analysts and economists.

Political Outlook:

What are the political risks to doing business in Hong Kong over the next 5-years?

BMI's Hong Kong country Risk Index evaluates the short- and medium-term threats to political stability.

Political Outlook Contents

  • SWOT Analysis for the Hong Kong Market - Political Strengths, Weaknesses, Opportunities and Threats facing Hong Kong.
  • Political Stability and Risk Assessment - BMI's Risk Index assesses explicit short- and long-term risks to political stability; latest positioning and trends for Hong Kong's risk are compared with regional and global averages.
  • Current Administration and Policy-making BMI assesses the threats to the continuity of economic policy, and likely changes to the business operating environment.
  • Long-Term Political Outlook BMI examines the structural risks to the stability of Hong Kong’s political system and the dominant public policy issues likely to affect decision-makers, and outlines scenarios for how the state could evolve in the medium to long term.

Key Benefits

  • Benchmark Hong Kong's risk profile against its neighbours, the global and regional average, allowing easy comparison of risks between key business markets.
  • Identify, evaluate and anticipate political and security risks to the business environment, and to your company's current operations and future plans.
  • Gain valuable insights into government and policy-making, through BMI's specialist team of analysts and economists, and their network of private and public sector sources.

Operational Risk

What are the current operational risks and difficulties associated with doing business in Hong Kong?

The Operational Risk section gives an evaluation of current risks and difficulties associated with operating in the market. It also provides a brief overview of the regional Operational Risk Index which benchmarks Hong Kong against its neighbours.

Operational Risk Contents

The chapter provides a summary of the main threats in the country, within:

  • Labour Market Risk (Education; Availability of Labour; and Labour Costs)
  • Logistics Risk (Market Size and Utilities; Quality and Extent of the Transport Governance)
  • Trade and Investment Risk (Economic Openness; Government Intervention; and Legal Risks)
  • Crime and Security Risk (Crime; Terrorism; and Interstate Conflict risks).

The report also drills down in greater depth to address key issues in one of the following segments most critical to the market:

  • Transport network, economic openness, cost and availability of labour, crime risks, bureaucratic environment, market size and utilities, and interstate conflict.
  • Assess your company’s exposure to country specific operational and business risks, using BMI’s insight on the current dangers of operating in the market.
  • Evaluate Hong Kong’s risk profile against its regional peers, helping you understand the market’s strengths and weaknesses in relation to other countries.

Key Sector Outlook*

Which industry sectors in Hong Kong will grow fastest, and where are the major investment opportunities in the market?

BMI identifies investment opportunities in Hong Kong's high growth industries including automotives, defence & security, food & drink, freight transport, infrastructure, oil & gas, pharmaceuticals & healthcare and telecommunications & IT.

Key Areas Covered:

  • Market Overview - Size and value of each industry, including recent sector developments and major industry key performance indicators (KPIs) that have impacted company performance.
  • 5-year Industry Forecasts - Forecasts for each year over 2015-2019, using BMI's proprietary industry modelling technique, which incorporates key domestic and international indicators - including economic growth, interest rates, exchange rate outlook, commodity prices and demographic trends - to provide fully integrated forecasts across and within each industry.
  • Demand- and Supply-Side Data/Forecasts - BMI's industry data covers both the output of each industry and the domestic demand, offering clear analysis of anticipated import/export trends, as well as capacity growth within each industry.

Key Benefits

  • Target strategic opportunities in high growth industries, which are benefiting from global mega trends, and thus offer strong investment and growth opportunities.
  • Compare the growth path of different industries to identify which are best placed to benefit from domestic and international economic prospects, and which have historically suffered from volatile growth trends - a key indicator of future risks.

*Not all Country Reports contain the Key Sector Outlook chapter. Please enquire above for more information.

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Testimonials

The sections that I find most interesting and useful are the macroeconomic data and forecasts for the country, top export destinations and economic activity. The indicators/analysis of these areas helps us orient our thinking, our assumptions and, consequently, our decisions in the commercial area.

Country Manager, DHL Express