"concern about Hong Kong's commitment to its 19-year-old currency link to the U.S. dollar." Last country I've heard lost its commitment to the USD was that one whose capital is Buenos Aires!!!
Hong Kong's deficit grows to HK$72.36 billion
30 November, 2002 11:30 GMT+08:00
HONG KONG (Reuters) - Hong Kong's budget deficit ballooned to HK$72.36 billion (US$9.28 billion) for the first seven months of the fiscal year, or about 60 percent higher than its target for the entire year.
<<even after cutting the civil servnats salaries, Jay??>>
The figure also showed a 15 percent deterioration from the HK$63 billion deficit recorded between April and October last year.
The mounting deficit has raised concern about Hong Kong's commitment to its 19-year-old currency link to the U.S. dollar.
The peg is often described as the rock on which the city's financial stability is founded, but some business people are increasingly calling for it to go, saying it is making the territory uncompetitive.
Hong Kong's fiscal reserves, which may be used to back the peg, are rapidly being eroded as the government dips into them to meet its budget shortfall.
Fiscal reserves fell to HK$300.1 billion at the end of October from HK$301.7 billion at end-September, the government said in a statement on Saturday.
Hong Kong, which has been ravaged by two recessions in four years, already has one of the highest budget gaps in Asia. It represents about 5.6 percent of gross domestic product.
For the first-half of the fiscal year, which ends in March, the government ran a deficit of HK$70.8 billion versus its full-year forecast of HK$45.2 billion.
Commerce Secretary Henry Tang said this week that the budget gap could hit a historic high this year.
Some analysts believe the government will have to hike taxes soon if the economy does not recovery as quickly as expected and boost revenue.
But Tim Condon, chief economist at ING Financial Markets, said the government should cut taxes instead to spur consumer demand, even if it adds to the deficit in the short run.
"Austerity is bad macro-economic policy," said Condon.
Most economists now expect the full-year deficit to reach more than HK$80 billion, or about 6.4 percent of gross domestic product.
However, the government said most of its revenues came in towards the end of the fiscal year ending March and that it was not unusual to have a large deficit early in the financial year.
Government revenues have been hit hard by the sluggish economy, particularly the 65 percent fall in residential property prices since 1997, because its revenues rely heavily on the property sector for income from land sales, property rates, and stamp duty.
The government posted a HK$63.3 billion shortfall last fiscal year, about the same as the level reached in the first seven months of that period.
Credit rating agency Standard & Poor's last month lowered its outlook on Hong Kong's local currency rating to negative from stable, citing the weak economy and yawning deficit.
Economists have said an ever-increasing deficit would sooner or later mean some form of higher taxation, undercutting the appeal of Hong Kong to foreign investors.
Capital would probably take flight, pushing up the risk premium on debt denominated in Hong Kong dollars. The government would probably hike interest rates to stop the outflow, heaping even higher costs on companies.
A task force report said earlier this year that the massive government reserves that underpin the peg could be wiped out by 2009 if the government did not tackle deficit.
Business people have urged the government to dump or adjust the currency peg to make the territory more competitive and some analysts say the Hong Kong dollar is overvalued by 10 to 40 percent.
But few expect the government will change its popular low-tax regime or tinker with the exchange rate as long as the economy remains weak. |
