 |
   |
|
 |
|||
|
4 October, 2000 Quarterly Hong Kong Review (Fourth Quarter, 2000) |
|
|
EXECUTIVE SUMMARY
- Hong Kong's real GDP growth moderated to 10.8% in the second quarter of 2000 due to the slowdown of exports. Looking ahead, the growth of exports would ease further as consumer demand in the US market would likely weaken after the 175 basis points interest rate hike since June 1999. This, together with the higher bases of comparison in the second half of 1999, would bring GDP growth down to a more sustainable rate of 5.7% in the second half of 2000.
- The year-on-year decline of the composite CPI eased more noticeably to 2.7% in August and is expected to narrow further. With the surge of international oil prices, Hong Kong's fuel and transportation costs would continue to rise. Meanwhile, improved sentiment in the real estate market would ease the decline of housing rentals.
- Despite the recovering economy, outstanding loans for use in Hong Kong fell by 1.9% year-on-year as at end-July due to high real interest rates which dampened loan demand, and bank's more conservative stance in extending loans due to the poor loan quality. Bank lending, however, is expected to resume positive year-on-year growth towards year-end as loan demand would likely recover thanks to falling real interest rates in line with the easing of deflation. Banks would also become more willing to increase lending as loan quality has begun to improve.
- Although Hong Kong's dependence on oil imports is relatively small compared to other neighboring Asian countries, its economy is not entirely shielded from the damage of prolonged spiraling of oil prices. Persistently high oil prices would hit both external and domestic demand in Hong Kong through dampening global economic growth and sending US interest rates higher. If crude oil prices increase by another 10% from the current level over the next 15 months, Hong Kong's real GDP growth is estimated to be cut by 0.4 percentage point to 3.8% in 2001.
- Listed local banks reported 47% higher aggregate attributed profits in the first six months of 2000 mainly due to the 58% decline in provision for bad debts. Meanwhile, operating profits increased by 10% thanks to declining funding costs which allowed banks to record a 6% increase of interest income, and banks' efforts to expand other revenue sources which led to a 21% higher non-interest income. While slow recovery in loan demand would still limit banks' income growth potentials in the coming months, ample liquidity would keep funding cost low, and help banks maintain steady interest margins. Bank profitability is thus expected to remain robust in the second half of the year.
- The HKMC raised the ceiling for its mortgage insurance program from the previous 15% to 20% beginning August 18, allowing homebuyers to borrow up to 90% of the value of mortgaged properties. The reduction of the down payment burden of homebuyers, together with the government's earlier moves to ease the supply of housing units for sale in the market, had helped to bolster market sentiments. Moreover, as the affordability of homebuyers is expected to improve given more bullish outlook on salary growth and growing signs that interest rates are nearing their peak, market transactions and property prices are expected to continue to pick up steadily.
- Moody's upgraded Hong Kong's short-term foreign currency rating from Prime-2 to Prime-1, and short-term domestic currency issuer rating of the government from A1 to Aa3. The upgrades reflect the resilience of Hong Kong's external financial position and the government's strong financial position. Moody's move strengthened market perceptions that Hong Kong would see steady economic recovery ahead.
Major Economic Trend
Economic growth expected to moderate in the second half
Following the 14.3% growth in the first quarter, Hong Kong's real GDP grew more slowly by 10.8% year-on-year in the second quarter. The more moderate growth was mainly due to the slowdown of exports. Export volume growth slid from 20.7% year-on-year in the first quarter to 17.7% in the second quarter as external demand was affected by higher interest rates in the US and European countries.
Looking ahead, the pace of Hong Kong's economic growth is likely to slow further in the second half of the year. Although consumption could remain robust, thanks to steady improvement in employment conditions and growing signs that US interest rates are reaching their peak, the growth of exports would ease further as consumer demand in the US market would likely weaken after the 175 basis points interest rate hike since June 1999. With the easing of external demand and the higher bases of comparison in the second half of 1999, year-on-year GDP growth is expected to fall to a more sustainable rate of 5.7% in the second half of this year, bringing full-year GDP growth to 8.8% in 2000.
Deflation eased more noticeably
Following the 3.2% year-on-year decline in July, Hong Kong's composite consumer price index (CPI) fell more modestly by 2.7% in August. While the granting of a 50% rebate on property rates during the third quarter of 1999 had provided a lower base of comparison which helped to narrow the year-on-year decline in housing costs, the prices of goods in other sectors had also shown smaller declines. Thanks to improving labor market conditions, as reflected in the decline of May-July unemployment rate to below 5% for the first time in two years, consumer confidence had strengthened and retailers were less pressured to engage in aggressive price war to boost sales. Meantime, the prices of fuel products and transportation posted mild year-on-year increases in line with the rise in international oil prices.
Looking ahead, the surge of international oil prices to 10-year highs in September would inevitably exert further upward pressure on Hong Kong's fuel and transportation costs. Moreover, improved sentiment in the real estate market after measures were introduced by the government in June to limit housing supply would also lend support to residential property prices and ease the decline of housing rentals. However, as consumers' purchasing power has remained feeble due to continued salary freeze this year, the room for retailers to raise prices would still be limited. The decline in this year's composite CPI is thus expected to ease only marginally from 4% in 1999 to 3.6% in 2000. Given the slowly easing deflationary trend, more notable increase in general price level would likely not be seen until the second half of 2001.
Bank lending continued to decline in 2000
Despite the strong rebound of the economy, bank lending had continued to decline during the first half of 2000. Outstanding loans for use in Hong Kong fell further by 1.9% year-on-year as at the end of July, after having contracted by 8.3% in 1999. The lingering slack in loan growth is in part due to the high real interest rates, which had dampened loan demand. It was also a result of banks' more conservative stance in extending loans due to the poor loan quality.
In line with the rising trend of US interest rates, Hong Kong's prime lending rate has been edging up since August 1999. By May this year, prime rate had increased by 125 basis points to 9.5%. After taking into consideration the decline in prices, the real prime rate averaged 13.1% in the first seven months of this year, up further from the 12.2% recorded in 1999. On the back of rising real cost of funds, businesses have relied less on bank loans for their financial needs and resorted to internal resources. Larger corporations and technology companies, meantime, took advantage of the stock market boom since the second half of last year, and raised funds by listing on the stock exchanges.
Apart from the slack in demand for loans, banks have also been conservative in lending, particularly to small- and medium-sized enterprises, to avoid a further deterioration in loan quality. Between end-1997 and September 1999, the ratio of classified loans to total loans rose from 2.08% to a high of 10.33%. More stringent assessment of loan application led banks to strictly require borrowers to provide collateral - usually in the form of property assets against their loans. However, as average residential property prices have fallen by 50% from their peaks in October 1997, the amount of new loans extended against the depressed property value had inevitably declined. Moreover, credit lines that were previously extended were also cut as banks revalued the loan collateral to reflect the fall in values.
Looking ahead, as real interest rates are likely to fall in line with the easing of deflation and the peaking of US interest rates, loan demand is expected to slowly recover. Meanwhile, banks would also become more willing to increase lending, as loan quality has begun to improve and property prices have slowly recovered. It is, therefore, expected that bank lending would resume positive year-on-year growth towards the end of the year.
.
After having plunged to US$ 10 a barrel in late 1998, international crude oil prices had nearly quadrupled over the past 21 months and reached a 10-year high of more than US$ 35 a barrel in early September 2000. If oil prices stay persistently at the present high levels or even go further up, Hong Kong could be adversely affected even though its reliance on oil is one of the lowest in Asia.
Although Hong Kong derives its energy supplies entirely from external sources, the direct impact of higher oil prices is believed to be relatively mild, given the territory's low reliance on oil to support economic growth. In 1999, retained imports of oil products accounted for only 1.3% of Hong Kong's GDP, the lowest compared to other non-oil producing economies in the region such as Taiwan (2.4%) and South Korea (5.6%). The subdued usage of oil in Hong Kong is mainly due to the intake of steam coal and natural gas for electricity generation since 1982 and late 1995 respectively. At present, only a meager 1.1% of electricity in Hong Kong is generated by fuel oil. Meanwhile, the relocation of factories across the border in China since the 1980s has also reduced the local consumption of oil products by industrial users. In 1998, the energy-reliant manufacturing sector contributed to only 6% of Hong Kong's GDP.
Rising oil prices would, however, be reflected in higher retail prices for towngas and liquefied petroleum gas (LPG) - the major fuel input used by most households and restaurants. The cost of gasoline and diesel oil for running motor vehicles would also go up, putting pressure on transportation companies to raise their fares. With the costs of fuel and transportation accounted for a material 7% weighting in the composite consumer price index (CPI), inflation is expected to go up along with rising oil prices. Although higher costs for fuel and transportation would inevitably hit the grassroots, the effects of rising inflationary pressure should not be overstated given the current deflation environment in Hong Kong.
Persistently high oil prices could, however, have a more substantial indirect impact on Hong Kong through hitting the global economy. According to a study conducted by the Organization for Economic Co-operation and Development (OECD), a US$ 10 surge in oil prices will reduce the growth of the US, Japanese and EU economies by 0.2, 0.4 and 0.2 percentage points respectively one year later. With the slowdown of global economic growth, the demand for Hong Kong's exports would decrease.
Meanwhile, as international oil trade is denominated in US dollar, higher oil prices would tend to increase the demand for the greenback and dampen the currencies of Asian countries, most of which are net-oil importers. A stronger US dollar vis-a-vis the Asian currencies would, in turn, weaken the competitiveness of the HK dollar given the link, and further depress the growth of Hong Kong's exports. As exports accounted for a substantial 109.5% of Hong Kong's GDP, the slowdown of exports would put a drag on the recovery of the Hong Kong economy.
Rising oil prices would also fuel inflation in the developed countries and send global interest rates higher. According to OECD's estimate, a US$ 10 hike in oil prices will increase US inflation by 0.4 percentage points a year later. To contain the inflation pressure, the US Federal Reserve may need to raise interest rates further, and Hong Kong interest rates would also have to go up as required under the peg. Through depressing equity prices and hitting domestic demand, higher interest rates could put a further drag on Hong Kong's GDP growth.
In summary, although Hong Kong's dependence on oil imports is relatively small compared to other neighboring Asian countries, its economy is not entirely shielded from the damage of a prolonged spiraling of oil prices. Persistently high oil prices would hit both external and domestic demand in Hong Kong through dampening global economic growth and sending US interest rates higher. If crude oil prices increase by another 10% from the current level over the next 15 months, Hong Kong's real GDP growth is estimated to be cut by 0.4 percentage point to 3.8% in 2001. That would mean a loss of HK$ 7 billion in GDP.
Bank profitability surged
in the first half of 2000
Banks in Hong Kong reported sharply higher profits
in the first six months of this year. Aggregate interim results of the 11
listed local banks (excluding Hongkong Bank to focus on domestic
operations, and Dao Heng Bank which has a different financial reporting
cycle) showed that profit attributable to shareholders surged by 47.3%
year-on-year, compared to the 11.3% decline recorded in the first half of
1999. Robust performance was largely led by the 58.1% decline in provision
for bad and doubtful debts in the first six months of this year, compared
to the 70.5% rise recorded in the same period of 1999. With the vigorous
write-offs of doubtful debt over the past two years, banks have largely
brought their problem loan under control. Meanwhile, thanks to the more
stringent credit control of banks after the Asian financial crisis and
given Hong Kong's improving macroeconomic conditions, the repayment record
of newly extended loans has also improved. As a result, there is no need
for banks to continue to make large provisions.
Top
Persistently high oil prices may drag economic recovery
Before adjusting for provisions, operating profits of the 11 listed local banks increased by a much moderate 10.4%, although still higher than the 4.4% during the first half of 1999. The faster growth was in part due to a 6.1% increase in net interest income. With ample liquidity thanks to the strong growth in deposits, the funding costs of banks have declined, which led to a widening of interest margin. The average spread between the prime rate and 3-month HIBOR, on which loan yield and funding costs are respectively based, widened further to 263 basis points (bps) in the first half of 2000, from 251 bps in 1999 and only 158 bps in 1998. The stronger profit growth was also a result of a 21.2% increase in non-interest income. In preparation for the upcoming deregulation of interest rate control on savings and current account deposits by July 2001, which is expected to hit interest income, banks have started to expand their non-interest revenue sources and raised service charges.
On the back of continued economic growth, banks in Hong Kong could look forward to further easing in the provisions for bad debts in the second half of the year. Meanwhile, although the slow recovery in loan demand would restrain the growth of loan volume, ample liquidity in the banking system is expected to keep funding cost low and help maintain steady interest margins. As a result, bank profitability is expected to remain strong in the second half of the year. In 2001, however, banks would have to deal with increased competition ushered in by the full deregulation of interest rate control. Funding cost would gradually edge up as banks - particularly the small- and medium-sized ones - compete for funds by offering more attractive deposit rates. As net interest margins narrow, profitability of the banking sector is likely to see more moderate growth in 2001.
HKMC raised mortgage insurance ceiling
Following government announcements in June to cut
the supply of subsidized residential flats for sale and abandon the 85,000
annual housing supply target to bolster property market sentiments, the
Hong Kong Mortgage Corporation (HKMC) lifted the ceiling for its mortgage
insurance program from the previous 15% to 20% beginning August 18.
Under guidelines set by the Hong Kong Monetary
Authority (HKMA) to protect banks from over-exposing to property-related
loans, banks in Hong Kong were allowed to extend mortgage loans
representing only 70% of a property's value. Following the launching of
the HKMC mortgage insurance program in March 1999, however, banks could
lend up to 85% of the mortgaged property value - without taking on
additional risk - by insuring up to 15% of the property value under the
HKMC insurance program. With the raising of the mortgage insurance ceiling
to 20%, banks can now extend mortgage loans covering up to 90% of a
property's value. The change would further reduce the down payment burden
of homebuyers, from 15% of the property value to 10%.
Although it seems the raising of the mortgage
insurance ceiling by 5% would make little difference, the move has
nonetheless bred improved market sentiments. Together with the earlier
string of government moves to limit housing supply, news of higher
mortgage insurance ceiling have apparently lifted market sentiments from
their doldrums in June. During the latest land auction held on August 29,
residential plots were sold at better-than-expected prices. Prices in the
secondary property market, as reflected by the price indices of selected
popular developments tracked by the Rating and Valuation Department, have
also showed slight improvement since July and edged up by 1.7% between
June and August, compared to the 13% decline between March and June.
Riding on recovering market confidence, property developers have also
stepped up marketing efforts for their new residential projects. In
August, the number and value of sale and purchase agreements, which fell
year-on-year by 28% and 29% respectively in the first seven months of this
year, grew by 52% and 32% respectively.
Looking ahead, improved market sentiment is expected to lend continued support to property prices and transactions. Meanwhile, the affordability of homebuyers is expected to improve given more bullish outlook on salary growth and growing signs that interest rates are nearing their peak. The decline in unemployment rate would also further boost the confidence of homebuyers. Barring unforeseeable negative market developments such as stronger than expected hike in US interest rate, property prices are likely to increase steadily in the coming months.
Moody's raised Hong Kong's short term ratings
On August 24, credit rating agency Moody's
Investors' Service Inc. upgraded Hong Kong's short-term foreign currency
rating from Prime-2 to Prime-1 and short-term domestic currency issuer
rating of the government from A1 to Aa3. According to Moody's, the
short-term foreign currency rating upgrade reflects the resilience of Hong
Kong's external financial position. Despite the fierce speculative attacks
on the Hong Kong dollar during the Asian financial crisis, foreign
exchange reserves remained strong at US$ 89.6 billion at the end of 1998,
equivalent to 17.5 months of Hong Kong's retained imports. Moreover, the
measures introduced by the HKMA in September 1998 to shore up the Hong
Kong dollar peg to the US dollar also strengthened the institutional
framework of Hong Kong's financial system. Meantime, the local currency
government debt rating improvement was due to the strong fiscal position
of the Hong Kong government. Moody's pointed out that the Hong Kong
government has one of the strongest financial positions in the world, with
extremely low debt levels and fiscal reserves equivalent to almost two
years of government expenditures. As a result, Hong Kong is in a better
position to deal with possible external financial shocks in the future.
Moody's move has strengthened market perceptions
that Hong Kong would see steady economic recovery ahead. With the improved
credit ratings, both the government as well as the private sector debt
issuers would benefit from lower debt financing cost. This would, in turn,
encourage companies to make more use of debt issues to raise funds,
drawing more foreign funds to finance the growth of the economy.
Hong Kong Major Economic
Indicators 1.9 -7.8 -1.3 - - - - - - - - - 5.0 -16.7 -8.0 -7.8 -7.3 -3.0 7.5 4.9 3.9 2.8 - - 1.1 -16.7 -1.5 -1.6 1.7 4.7 14.1 10.6 10.2 7.4 - - Property Market 13.1 -26.3 -3.4 -1.4 0.0 -2.1 -0.7 -0.0 - - - - 12.5 Sales
& purchase agreements 868.0 341.1 257.3 86.2 52.9 51.4 55.1 50.8 17.7 11.7 17.6 23.7 -11.1 -8.1 11.5 10.0 10.8 12.4 13.0 18.4 18.1 16.3 13.4 92.8 89.6 96.3 88.6 90.4 96.3 93.8 97.1 95.2 97.1 98.9 100.4 15.0 16.2 20.7 19.6 20.2 20.7 19.0 18.7 17.7 17.9 18.1 17.8 6.9 3,590 Jason Kwok Joe Lo Ellen Cheuk Alice
Chan Tel: (852)
2868-8443
Income
Real GDP growth (%)
GDP per capita1 (HK$ )
203,605
Real GDP
per capita growth (%)
Inflation
(%)
Composite CPI
CPI (A)
CPI (B)
CPI (C)2
Labor Market
(%)
Unemployment rate3
Underemployment rate3
Retail Sales' yoy growth
%)
Value
Volumn
(period
change %)
Residential price
Residential rent
Office price
Office rent
(HK $ bn)
External Sector (HK$ bn)
Domestic exports (yoy growth
%)
Re-exports (yoy growth %)
Total exports (yoy growth %)
Imports (yoy growth %)
Trade balance
Tourist arrivals (yoy change
%)
Hotel occupancy (%)
Foreign
exchange reserves (US$ bn)
Import
coverage (months)
Exchange rate
(HK $ /US$ )
period end
period average
Money and Banking (yoy growth
%)
Currency in hands of public
HK$ M1
HK$ M24
Interest rates (period end, %
p.a.)
Prime lending rate
3-month HIBOR
Stock
Market
Hang Seng Index (period end)
Market capitalization
(period end, HK$ bn)
Average daily turnover (HK$
bn)
Notes:
1 - New method of population calculation
was used beginning 1999.
2 - Referred as Hang Seng CPI up to June
1999.
3 - Monthly figures are three-month moving
average.
4 Adjused for freign currency
swap deposits.
North Asia
Chief Economist
Senior
Economist
Economist
Senior Information Officer
