More slow growth in 2016
GDP growth slowed to +2.4% in 2015 (from +2.6%) due lower exports and investment. Insolvencies increased by +13% in 2015. In 2016, EH expects GDP growth to slow further (+2%), insolvencies to continue to rise (+15%). Downward pressures will stem from weak exports and low private investment. China’s imbalanced rebalancing will continue to weigh negatively on the economic activity through lower exports, weak retail sales (as tourist arrivals recede) and volatile financial sentiment.
Improving demand growth in large advanced economies will provide limited cushion due to its nature (more domestic oriented) and pace (very moderate). Domestic conditions will remain unconducive for private investment growth with tightened monetary policy, lower new orders and volatile financial sentiment. Government support will likely step up with further expenditures in infrastructures and salaries tax cuts. Lower inflation, more favourable fiscal environment and firm labour market will help keeping private consumption in positive territory.
Monetary policy to remain tight
Monetary policy is determined by the currency board that pegs the HKD exchange rate to the USD, Therefore, interest rates mirror those of the U.S. In that respect, Hong Kong monetary policy was tightened in line with the previous Fed hike. Assuming a gradual tightening of the FED, this trend is set to continue going forward. This will translate into tougher credit conditions for the private sector but also lower inflationary pressure. The latter has already eased with lower commodity prices and lower property prices. We expect further reduction over 2016 (+2.5% from +3.0% in 2015).
Healthy public finances and sound external position should act as buffers
Hong Kong has built significant buffers overs the past years. Fiscal reserves stand at 35% GDP. Public debt is low and fiscal balance is in surplus. The government’s plan in its 2016 budget is clearly pro-growth, planning further expenditures to support innovative companies (start-up, high-tech oriented companies), infrastructure development and households consumption (tax cuts). Furthermore, the external position is comfortable as Hong Kong continues to record large current account surplus, maintain large level of reserves. External debt is large but should not be a matter of concern in the short-run as the country has a large net creditor position: net external financial assets represent 316% of GDP.