Download Hong Kong Economic Situation and Insurance Industry

The Budget 2005-2006:
My Views
Stephen Yan-Leung Cheung
Prof. (Chair) of Finance
City University of Hong Kong
Content
1. Hong Kong Economy
2. How can we position ourselves?
3. Opportunities in China Market
4. Uncertainties
Government Deficit (I)
Year
2004-05 2005-06 2006-07 2007-08 2008-09
($billion) ($billion) ($billion) ($billion) ($billion)
Operating revenue
165.6
170.7
177.7
184.9
194.8
Operating expenditure
212.2
210.6
207.1
203.5
200.0
Operating surplus/ (deficit)
(46.6)
(39.9)
(29.4)
(18.6)
(5.2)
Capital revenue
37.9
56.8
44.5
56.0
49.3
Capital spending (including
payments from the Capital
Investment Fund)
53.4
52.3
45.9
39.6
37.1
(15.5)
4.5
(1.4)
16.4
12.2
20.0
0.5
1.0
1.0
1.0
1.0
4.0
3.5
(2.4)
15.4
11.2
Capital financing surplus/ (deficit)
Government bond issuance
- Proceeds
- Interest expense
Capital financing surplus/ (deficit)
after bond issuance
Government Deficit (II)
Year
2004-05 2005-06 2006-07 2007-08 2008-09
($billion) ($billion) ($billion) ($billion) ($billion)
Consolidated surplus/ (deficit)
before bond issuance
- as a percentage of GDP
(62.1)
(35.4)
(30.8)
(2.2)
7.0
4.9%
2.7%
2.2%
0.2%
0.5%
Consolidated surplus/ (deficit)
after bond issuance
- as a percentage of GDP
(42.6)
(36.4)
(31.8)
(3.2)
6.0
3.4%
2.7%
2.3%
0.2%
0.4%
Fiscal reserves after bond issuance
- as number of months of
Government expenditure
223.8
10
187.4
9
155.6
7
152.4
8
158.4
8
286.0
22.5%
277.7
20.8%
270.2
19.3%
264.3
18.0%
259.3
16.9%
Public expenditure
- as a percentage of GDP
Source: The Budget 2004-05
Observations (I)
• Operating revenue cannot cover operating
expenditure
• Operating deficit will last until 2008/09
• Consolidated deficit will last until 2007/08
Observations (II)
• The consolidated surplus/ (deficit) is
boosted by the 20 billion bond issue
• Interestingly, Mr. Tang’s speech did not
mention about the payment
• Issuing bond is a source of financing not
income
Operating Expenditure Forecast
(in $billion)
220
215
218.0
Target
217.4
212.2
210
210.6
207.1
205
Forecast
203.5
200.0
200
200.0
195
190
03-04
04-05
Source: The Budget 2004-05
05-06
06-07
07-08
08-09
Operating Revenue Forecast
(in $billion)
210
200
200
190
194.8
Target
184.9
180
177.7
170
160
170.7
155
165.6
Forecast
154.8
150
03-04
04-05
Source: The Budget 2004-05
05-06
06-07
07-08
08-09
Surplus/Deficit Forecast (in $billion)
10
0
-10
-20
-30
-40
-50
04-05
05-06
Operating Surplus/ Deficit
Source: The Budget 2004-05
06-07
07-08
08-09
Consolidated Surplus/Deficit
Observations (III)
• Operating expenditure drops from 218
billion in 03/04 to 200 billion in 08/09
→ 8% decrease
• Operating revenue increases from 155
billion in 03/04 to 200 billion in 08/09
→ 29% increase
• Question is how to boost up government
revenue
Facts
• Hong Kong has a narrow tax-base
• No room to increase direct tax rate
– Salary tax
– Profit tax
• Depend too much on direct tax
– 40:60 (indirect tax: direct tax)
• Only 40% working population pay salary tax
• For those who pay the standard tax rate (less
than 1%) are responsible for more than 20% of
the salary tax revenue
• Government becomes serious on GST
Economic Situation
• Hong Kong GDP in Q3 increased to 7.2%
• Close to the GDP in 2000 Q1, which was
13.6% (IT bubble)
• The total exports in Q4 2004 increased
around 13%
• Tourism, individual travel scheme
• CEPA
Property Market Recovery
• Recovery in 2003 Q4 and 2004 Q1
• Number of transactions increased by 22%
in the first half of 2004 over the second
half of 2003
• Average property price dropped slightly
recently but prices went up by 26%
relatively to mid-2003
• Affordability ratio improves substantially
Prices for Residential Property
Tourism
• Number of tourists arriving at Hong Kong
increased
– substantially from China, and
– from other destinations
• Number of tourists arriving at Hong Kong
in June 2004 exceeded the pre-SARS
level
• In July 2004, number of tourists reached
1.99 million
Visitor Arrivals
Consumption
• Private consumption expenditure had an
average growth of 7% in real term in Q1-3
2004
• The volume of total retail sales increased
by 6.8% in Dec 2004
• Reflection of strong rebound of local
consumers and tourists
Private Consumption Expenditure
Hong Kong’s Price Movement
Market Forecast
Hong Kong’s Economic Growth
Government
BOC HK
HSBC
DBS
Merrill Lynch
Citibank
INC
Forecast (%)
7.5
7.6
7.8
7.5
8.0
6.5
7.5
Sources: Census and Statistics Department, Reuters, and BOCHK Research
Hong Kong Economic Situation (I)
Two Problems
1. Deflation
–
–
–
A period of 5 years & 8 months
CPI increased by 0.2% in Dec 04 but fell by 0.5% in
Jan 05
Declined in prices were recorded in Jan 2005 for
housing (-3.1% in the Composite CPI), durable
goods (-2.0% in the Composite CPI), miscellaneous
services which cover package tours (-1.6% in the
Composite CPI), and transport (-0.1% in the
Composite CPI)
Hong Kong Economic Situation (II)
2. Unemployment
•
•
•
•
•
•
Unemployment rate at 6.4% in Nov 04 - Jan
05
Structural problem
Possible to drop to 5 - 6%
The age group of 15 -19 has high
unemployment rate
How to improve the education level of
population?
How?
Uncertainties
• Oil price
– US$50/barrel
– US economic figures good/bad?
– US interest rate increase
China Economy
• Macro-economic adjustment started to
work?
– Fixed asset investment slowed
– 2004 Q1-3 GDP increased 9.5%
– Inflation is 1.9% in Jan of 2005
• Prices of food items increased by 4.0%
• Prices of non-food items increased by 0.8%
• China economy further down may affect
the external trade of Hong Kong
Budget 2005-2006
• Recurrent revenue and non-recurrent
revenue will increase
• Budget deficit will decrease substantially
• Structural deficit?
• How to match recurrent expenditure with
recurrent revenue?
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