Abstract
The near-term outlook for Hong Kong' s trade-based economy is decidedly grim.
With global economic
headwinds continuing to gather at an alarming pace,
it looks set to be buffeted by slowing global demand,
more violently than
initially anticipated. In particular, the services sector, which had held up
relatively
well in Q308, is expected to show sharp declines in the coming
quarters as demand for trade and financerelated
services falter. We have
further lowered our forecast for GDP growth in 2009 to -3.6%, and
anticipate a mild recovery in 2010.
Under our core views, we are
forecasting the US economy to contract by 2.3% in 2009, while Asia' s
powerhouse - China - will see growth slow sharply from 9.0% in 2008 to just
5.6%. The phenomenon is
widespread as recent data releases suggest that
other nations in the region have also been severely
affected. Notably,
global trade figures across the world have come down sharply in late 2008 and
at the
start of 2009, with many Asian countries registering double-digit
declines in exports. The worst hit
nations include Singapore, Taiwan,
South Korea and Japan, and we expect Hong Kong to perform along
similar
lines.
Indeed, Hong Kong became the second Asian economy behind Singapore
to officially enter recession,
after real GDP contracted by a seasonally
adjusted 0.5% quarter-on-quarter (q-o-q) in Q308 to compound
the 1.4%
decline recorded in the previous quarter, according to the Census and
Statistics Department. The
available data indicates that the slowdown in
GDP growth had begun as early as Q108 and became worse
in the subsequent
quarters. As a broad measure of comparison, real GDP growth decelerated
sharply from
7.3% year-on-year (y-o-y) in Q108, to 4.2% in Q208 and 1.7%
in Q308. We expect the downtrend to
continue over the coming quarters,
with very limited scope for a quick recovery. Accordingly, we have
also
lowered our forecast for Hong Kong' s full-year GDP growth for 2009 from -2.2%
to -3.6%. Given
that we foresee the global economy remaining weak in 2010,
Hong Kong' s recovery will be mild.
Hong Kong is the world' s most
services-oriented economy, with the sector making up over 90% of GDP.
However, the services sector, which had performed relatively better than the
other sectors in Q308, looks
set to plunge sharply.
Hong Kong' s budget
deficit will widen sharply in FY2009/10 (April-March), as expenditures
remain
robust due to more measures to prop up employment, while revenues
are expected to decline. However,
the government should have more than
sufficient fiscal reserves to fund its increased expenditure.
The Hong
Kong Monetary Authority (HKMA) continued to cut rates aggressively in Q408,
mimicking
the aggressive easing conducted by the US Federal Reserve.
However, with the base rate now set so close
to zero, the HKMA is likely
to turn to more unconventional methods of monetary easing in the coming
months. Yet, despite their best efforts, we continue to believe the
authorities will fall short in their pursuit
of halting the economic
downturn, and therefore we have further reduced our growth forecast for 2009
to
-3.6%.
Hong Kong' s balance of payments surplus will be eroded over
the coming year as global trade stalls,
leading to sharp falls in external
demand for services. Likewise, both direct and portfolio flows should
fall
as uncertainty continues to dog the medium-term outlook of the global
economy.
In the Asia Pacific, we profile 23 companies. These are AEGON,
AIG, Allianz, Aviva, AXA, Cardif,
Fortis, Generali, Groupama, HDI-Gerling,
HSBC Insurance, ING Group, Liberty Mutual,
Manulife, MetLife, Prudential
Financial, Prudential plc, QBE, RSA, Sun Life Financial, The
Hartford,
Principal Financial Group and Zurich Financial Services.
We estimate that,
over the course of 2008, total premiums in Hong Kong rose by 8% to
HKD212,314mn.
Non-life premiums rose by 11% to HKD27,014mn, while life
premiums rose by 7% to HKD 185,300mn.
Between now and the end of the
forecast period, we expect that annual non-life premiums will grow by
HKD6,747mn, while annual life premiums should increase by HKD25,021mn. Growth
in non-life
premiums should be driven by the general growth in nominal GDP
plus a rise in non-life penetration from
the current level of 1.55% to
1.60%. Growth in life premiums should be driven by the change in the
overall population and a rise in life density from US$3,258 to US$3,500 per
capita.
BMI' s Insurance Business Environment Rating is 76.5.
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