Fitch Ratings: Predicts Hong Kong's Economy to Grow by 3% This Year, Hong Kong Government Debt Will Increase

On March 1st, according to the latest assessment by the rating agency Fitch, the Hong Kong government proposed a slow pace of fiscal consolidation in the budget released on February 28th. However, considering its sizable financial cushion, it is currently unlikely for the fiscal dynamics to put downward pressure on Hong Kong's "AA-" / stable credit rating. Fitch pointed out that they are currently forecasting Hong Kong's economic growth rate to be around 3% in 2024, compared to the 3.2% growth in 2023. Their forecast aligns with the Hong Kong government's prediction of 2.5%-3.5% growth. The ongoing recovery of inbound tourism, supported by the budget allocating 1.1 billion Hong Kong dollars for hosting large-scale events and promoting cultural tourism, as well as stabilizing external demand, will sustain the region's growth momentum. However, despite easing policy restrictions on the real estate market in the budget, Fitch does not expect a strong rebound in the property market in the short term due to high interest rates and tight financing conditions causing pressure on sentiment. Fitch stated that the proposals in this budget are in line with the assumptions made when confirming Hong Kong's credit rating on February 21st, which include the government not aiming for a balanced budget in the short term, but instead balancing it over the business cycle and rebuilding fiscal cushion funds in the medium term. Fitch believes that Hong Kong's long-term fiscal policy is still constrained by the Basic Law, which stipulates that the region's spending should be within its income range and efforts should be made to maintain a balanced budget. Hong Kong achieved continuous fiscal surpluses in the fifteen years before 2019. The budget anticipates a fiscal deficit of 4.6% of GDP for the fiscal year ending in March 2025, lower than the slightly under 6% deficit estimated for the 2024 fiscal year. The Hong Kong government expects the deficit to gradually narrow in the coming years and return to surplus in the 2027/28 fiscal year. This trend will benefit from controlling expenditure growth and adjusting capital spending plans. The budget also proposes various revenue initiatives such as increasing income tax for high net worth individuals, reinstating hotel accommodation tax, and implementing a global minimum corporate tax on large multinational corporations. Fitch forecasts an increase in Hong Kong government debt, with bond issuances averaging around 124 billion Hong Kong dollars annually through the government's Green Bond Program and infrastructure bond program, continuing until the 2028/2029 fiscal year. This will support the government's development plans for the Northern Metropolis Area and other infrastructure projects. However, the government's fiscal debt/GDP ratio will remain below many "AA" rated peers. Fitch stated that Hong Kong's current fiscal reserves account for about 23% of GDP, which is still its primary credit strength. However, reserves have decreased from their pre-pandemic peak. Fitch expects reserves to come under pressure in the coming years, but Hong Kong's fiscal debt/GDP ratio is still lower than many "AA" rated peers. The growth risks facing Hong Kong are predominantly tilted to the downside. Short-term risks include a worsening global economic recession or continued high interest rates in the long term. Risks also come from China's structural growth slowdown and long-term geopolitical tensions disrupting global trade. Additionally, Hong Kong faces pressure from an aging population, and it is expected to face challenges in restoring its business vitality and competitiveness as a global financial and commercial center after social unrest.