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Hong Kong
UOB Economics Projections
2007
2008
2009F
2010F
GDP
6.4
2.4
-5.0
3.5
CPI (average, y/y)
2.0
4.3
0.3
-0.5
Unemployment Rate (%)
3.2
3.8
6.2
5.8
Current account (% of GDP)
12.1
14.5
10.5
7.4
Fiscal balance (% of GDP)
7.5
0.1
-3.9
-1.6
Extending from its actions earlier, HKMA ratcheted up its interventions during 2Q09 to keep USD/HKD from hitting
the lower bounds of the 7.75-7.85 peg range. Nevertheless, market participants are still sanguine on the outlook for
the HKD, pricing in little change to the status of the peg over the next 12 months. We expect the HKD to continue to
hover within the 7.75-7.85 range against the USD.
HKMA in 2Q09 injected roughly a net HK$175bn to buy USD/sell HKD. This massive infusion of liquidity conditions
has allowed the HIBOR to remain low. The rise in asset prices helps to offset the economic contractions. Among the
beneficiaries are the property market, which saw transaction volume picking up sharply in 2Q. In tandem with this,
mortgage loans volume has also accelerated.
1Q09 GDP should mark the worst point in the current cycle, as the HK economy contracted 4.3%q/q sa, worse than
the -1.9%q/q pace in 4Q08 and the worst on record. We have cut HK’s 2009 forecast to -5.0% from -4.0% previously,
and expect at lest another 3 more quarters of declines during the current year. Loose monetary policy and recovering asset prices, coupled with relatively healthy fundamentals, suggest that recovery in 2010 should remain on
track, for a 3.5% growth.
HKMA Ratcheting Up Interventions
Extending from its actions earlier, HKMA intensified its
FX interventions during 2Q09 to keep USD/HKD from
hitting the lower bounds of the 7.75-7.85 peg range.
Capital inflows into emerging markets including HK
made a comeback in 2Q09 as low interest rates and
loose monetary policy globally coupled with dissipation
of extreme fears led to a revival of risk appetite.
Nevertheless, market participants are still sanguine on
the outlook for the HKD, pricing in little change to the
status of the peg over the next 12 months. This was in
contrast to earlier episodes when market participants
back in 2004/05 (prior to RMB depeg) and around late
2006 (as RMB appreciated) were pricing in a break in
the HKD peg. Currently, we see little risk of a change
HK: USD/HKD Forward Prices
HK: USD/HKD Trend
HKD+3M Index
HKD+6M Index
HKD+12M Index
7.84
7.85
7.82
7.80
7.80
7.75
7.78
7.70
7.76
7.65
7.74
Jul 04
Jul 05
Jul 06
Jul 07
Source: CEIC, UOB Econ-Treasury Research
40
Quarterly Global Outlook 3Q2009
UOB Economic-Treasury Research
Jul 08
7.60
Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09
Source: CEIC, UOB Econ-Treasury Research
Hong Kong
in the status quo over the next 6-12 months, especially
in view of the current synchronized downturn in global
economic activities.
With the global recession still taking shape, there is a low
probability of a significant move on FX policy either from
China or HK. Despite talks of a “super reserve currency”,
there is clearly a lack of an alternative to the USD, and
we see HKD peg to remain intact for now. As such, over
the next 6 to 12 months, we expect the HKD to continue
to hover within the 7.75-7.85 range against the USD.
Monetary Policy Turning Easy
As a result of the HKMA intervention actions, HK monetary policy has turned loose in tandem with the US Fed
policy stance. Based on the change in Aggregate Balances, HKMA in 2Q09 injected roughly a net HK$47bn
to buy USD/sell HKD, compared to a net withdrawal of
roughly HK$100mn in 1Q09, to keep HKD from getting
past the strong side of the 7.75-7.85 band. At the same
time, HKMA also injected HK$128bn through Exchange
Funds bills. This massive infusion of liquidity of about
HK$175bn has allowed the HIBOR to remain low (with
3M HIBOR falling to as low as 0.33% in late May, the
lowest since late 2004), which helps to offset the current
economic contractions.
This infusion of liquidity has helped to support assets
prices and the property market is one of the key beneficiaries, which saw transaction volume picking up sharply
in 2Q. In tandem with this, mortgage loans volume has
also accelerated to levels last seen in early 2008 during
the height of the previous property market run-up. Going
forward, with the US Fed likely to keep interest rate low
at least until 1H2010 (please see the US section in this
report for further details), flush liquidity conditions in HK
are likely to persist for some time, thus rendering further
support to asset prices.
Hong Kong: Property Transactions and Mortgage Volume
HK: Property Transactions (LHS)
HK: New Residential Mortgages Approved
Number of S&Ps
35,000
30,000
16,000
14,000
25,000
12,000
10,000
20,000
8,000
6,000
15,000
4,000
2,000
Dec 00
10,000
5,000
Dec 02 Dec 04
Dec 06 Dec 08
Source: CEIC, UOB Econ-Treasury Research
Economic Conditions Remain Challenging
Amidst signs of stabilization globally, 1Q09 GDP
should mark the worst point in the current cycle, as the
HK economy contracted 4.3%q/q sa, worse than the 1.9%q/q pace in 4Q08 and the worst on record. On a
y/y basis, top line figure contracted 7.8%y/y from -2.6%
in 4Q, the second largest decline since the 8.1% fall in
3Q98 during the Asian financial crisis. As has been the
case for other open economies, both domestic and external sectors contributed to the sharp declines, which saw
HK: GDP Growth
HK: Property Price and Labour Market Trend
GDP
Private Consumption
Capital Investment
HK Property Price Index (1999=100)
HK Unemployment Rate: Inverted % (RHS)
200
HKD millions
20,000
18,000
0
160
2
120
4
80
6
40
8
15.0
10.0
%y/y
5.0
0.0
-5.0
-10.0
0
Jan 93
Jan 97
Jan 01
Jan 05
Source: CEIC, UOB Econ-Treasury Research
10
Jan 09
-15.0
-20.0
Mar 05
Mar 06
Mar 07
Mar 08
Mar 09
Source: CEIC, UOB Econ-Treasury Research
Quarterly Global Outlook 3Q2009
UOB Economic-Treasury Research
41
Hong Kong
domestic demand contracting 7.5%y/y in 1Q09 (same
as in 4Q08), and exports collapsing nearly 20%y/y (from
HK: GDP Growth
Labour Force (mn persons)
Unemployment Rate (%) - LHS
9.0
3.8
8.0
3.7
7.0
3.6
6.0
3.5
5.0
3.4
4.0
3.3
3.0
Jan 03 Apr 04
Jul 05
3.2
Oct 06 Jan 08 Apr 09
Source: CEIC, UOB Econ-Treasury Research
42
Quarterly Global Outlook 3Q2009
UOB Economic-Treasury Research
about -4%y/y in 4Q08).
One key indicator of the weak domestic demand is that
headline jobless rate has spiked up in the current cycle. The jobless rate has climbed by 2.3%pt to 5.4% in
the space of about 15 months. The extent of increase is
similar to the previous two downturns in 1997/98 financial crisis and the 2000/01 tech bubble burst. Given the
pace of increase, we expect the headline jobless rate to
continue to move higher to 6% before the end of 2009,
which would the highest level since early 2005.
In view of the sharp drop in 1Q, we have cut HK’s 2009
GDP forecast to -5.0% from -4.0% previously, and expect at lest another 3 more quarters of declines during
the current year. Loose monetary policy and recovering
asset prices, coupled with relatively healthy fundamentals, suggest that recovery in 2010 should remain on
track, for a 3.5% growth.