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HONG KONG: FUTURE RISKS
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1. I have pored over the budget documents to examine the
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where we might usefully seek more information. A more detailed report is attached.
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My main conclusion is that although there is a large reserve cushion forecast ($50bn) it is only 4 per cent of forecast 1997 GDP. Relatively un-cataclysmic events over the next five years could make the financial position rather precarious. For example, a net increase above forecast in government spending of 0.8 per cent GDP for each year over the period would wipe out the. cushion.
3. The improved fiscal situation/ -outlook is not a result of higher GDP growth or more optimistic growth assumptions. The trend growth rate assumption has actually slipped half-a per cent. The improvements were on the revenue-side (taxes and land sales, 0.7% GDP over - budget) but also a shifting back and possible trimming of capital expenditures and equity investment (underspend of 1.2% GDP). In principle, slippages could reverse these gains...
4. Lower growth in future years would adversely affect revenues. Average growth of 3 per cent (against 5 per cent forecast) would --
However there is scope to increase revenues as the revenue: GDP ratio is shown to fall in the medium range forecast.
just be manageable within the reserve cushion.
5. There are nonetheless still some concerns. The detail on the cost and sources of financing of PADS remains scanty. We will be in a better position with the Airport Financial Plan which should be out next week. On the information that I have seen I am not convinced that it is fully costed into the budget forecast. In terms of government PADS capital projects the costing basis of the existing commitments is not clear. There may be other projects not yet approved and not yet included in
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There is also the question of equity provision for MTRC and the PAA. First, although the budget makes a forecast of equity. financing we do not know where it is going. The most recent forecast suggests lower levels of equity financing than previously though the requirements may actually have increased. Second, we have only an indication of the callable capital requirements of the MTRC and we do not know if MTRC profits were included in the budget forecast. Third, we do not know the eventual demands of the PAA after taking account of transfers from Kai Tak profits (as envisaged in the appraisal).
7. We might usefully be better informed about the Land Fund. The forecasts show a considerable income from land sales (after We do not know the basis for subtracting the SAR contribution).
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CODE 18-77