Hong Kong

Hong Kong’s public finances will remain strong in the medium term. Fiscal support played an important role during the pandemic to sustain livelihoods. Measures included lowering profit tax, waiving business registration fees, reducing government charges, distributing consumption vouchers, granting a 100% salary-tax reduction, reducing property rates for residential properties and providing allowances. A fresh package of pandemic support measures was announced in 2022 in response to renewed infection waves and the economic impact of China's zero-Covid policy. As a result, Hong Kong's fiscal balance – which had been in surplus from 2005-2018 – registered huge deficits of -9% of GDP in 2020 and -7% in 2022. Thanks to revenues from land sales and profit taxes, the fiscal balance is expected to improve in 2023-2024 and may move back into surplus by 2025. In any case, ample fiscal reserves mean that financing budget shortfalls will not be a threat to Hong Kong’s fiscal sustainability in the medium term. Moreover, fiscal debt is very low at less than 10% of GDP.

Hong Kong’s external finances will also remain robust in the medium term. The current account balance has been in surplus for 25 years now, including during a number of external and domestic shocks such as the Great Financial Crisis 2008-2009 and the Covid-19 pandemic. This has resulted in the accumulation of huge external financial assets, which provide the economy with a strong cushion against future sudden shocks. Macroeconomic structural vulnerabilities are generally scarce, with the trade-dependence of the economy being the main potential weakness. This reliance, and in particular on exports to China, makes Hong Kong exposed to potential cyclical slowdowns in global demand and in China, as well as potential trade tensions (e.g. between the US and China). Hong Kong's foreign exchange reserves are more than sufficient, covering  approximately seven months of imports or, in other terms, around 14 times all external debt payments falling due in the next 12 months – very favorable ratios. In another area of external accounts, gross external debt currently amounts to over 500% of GDP. While this appears very high, it is mostly intra-corporate group debt, reflecting Hong Kong’s position as a global and regional financial center. Moreover, Hong Kong is a large net external creditor on both a sovereign and economy-wide basis, with net external assets estimated at more than 100% and 300% of GDP, respectively.