Hong Kong’s Latest Budget Surplus Continues Credit Positive Trend

Hong Kong’s Latest Budget Surplus Continues Credit Positive Trend

Hong Kong’s Financial Secretary John Tsang presented the fiscal 2012-1329 budget last Wednesday. Measures to offset the effects of negative external conditions on the Hong Kong economy during the coming year were included. The budget also contained the government’s estimate of a substantial surplus for fiscal 2011-12, a credit positive at a time of slower growth in mainland China and global financial market uncertainties. The fiscal outcome further increases Hong Kong’s fiscal reserves and puts the Special Administrative Region (SAR) in a strong position to face uncertain external conditions.

The consolidated surplus of HKD66.7 billion ($8.6 billion) for the current fiscal year, at about 3.5% of GDP, will be the latest in a string of budget surpluses going back to FY2005-06. Prior to that year, the government recorded deficits for six of the first seven fiscal years following Hong Kong’s return to China in 1997, but these deficits were financed almost entirely by drawing down the government’s fiscal reserves. As a result, the SAR government has the lowest level of government debt in relation to GDP of any government we rate, with the exception of debt-free Macao (rated Aa3).
Seven years of surpluses have meant a substantial build-up in fiscal reserves, which doubled to HKD595 billion now from HKD288 billion at the end of FY2004-05. At their current level, the reserves would finance 19 months of government expenditure and are equivalent to 32% of GDP.

Hong Kong Budget Balance and Fiscal Reserves

The budget presented last week includes a deficit of HKD3.4 billion, or 0.2% of GDP in FY2012-13. The move to a basically balanced position from a large surplus reflects measures to stimulate economic growth in the face of an adverse external environment. These measures include various one-time personal and business tax reductions, subsidies, rental waivers for public housing, and increased social security payments. The government estimates that the economic stimulus resulting from these measures will add 1.5 percentage points to GDP growth during the year.

We believe that the operational assumption of a 2.0% rise in real GDP included in the budget even after the effects of the fiscal stimulus is too pessimistic. While the risks cited by the financial secretary to the global economy are real, Hong Kong’s links are most importantly to the rest of China and to the US, with Europe being less important. Even if growth slows somewhat in China, it will still be relatively strong, and the SAR’s role as China’s international financial center will continue to benefit Hong Kong. Furthermore, the US economy seems likely to record somewhat stronger growth than last year, although still at a modest pace.

However, the outcome of last year’s budget and the resultant strengthening of the fiscal reserves mean that even if there is a fiscal deficit, the government will easily be able to finance it without resorting to debt issuance. The budget outcome also demonstrates the continued resilience of Hong Kong’s government finances following surpluses even in 2008 and 2009, when the fiscal positions of many other governments worldwide deteriorated.