HONG KONG: The local economy is likely to expand 4 to 5 percent this year, as the city gradually overcomes the impact of the global financial crisis, Financial Secretary John Tsang said in his third budget address yesterday.

Tsang said the local economy achieved year-on-year growth of 2.6 percent in the fourth quarter, after contracting for four consecutive quarters, as the mainland economy returned to faster growth and the economies in the US and Europe began to stabilize.

For 2009 as a whole, gross domestic product (GDP) dropped by 2.7 percent, compared with a 2.5 percent increase in a year earlier.

"I am cautiously optimistic about Hong Kong's economic prospects for 2010. The global economy has not yet regained its vigor. There remain a number of uncertainties and potential pitfalls in the external environment," Tsang said in the Legislative Council yesterday.

Tsang, meanwhile, forecasts that the inflation rate for 2010 will rise by 1.5 percent, while the average rate of headline inflation will be 2.3 percent.

He told lawmakers in his 2010 Budget Speech that commodity prices have generally rebounded and that food prices on the mainland have also risen.

"If the US dollar exchange rate remains soft and these price increases continue, it will add to imported inflation, especially in the latter part of the year, which in turn may impose a heavier burden on Hong Kong people," he added.

Economists are generally optimistic about the city's economic prospects in 2010. Deutsche Bank AG expects the local economy to grow 6.5 percent this year, while Bank of East Asia and Hang Seng Bank estimate 5 percent and 3.5 percent growth rates, respectively.

The financial secretary expects the government to post a HK$13.8 billion budget surplus for this fiscal year, compared with his earlier forecast of a HK$39.9 billion deficit. The city's fiscal reserves will also increase to HK$508.2 billion by March 31.

"The huge inflow of funds resulting from the global low-interest environment and the quantitative easing policy adopted by many countries has given rise to hectic trading in both the stock and the property markets. As a result, revenue from stamp duties has reached HK$40.5 billion, which is higher than the original estimate of HK$15.5 billion," Tsang said.

Total government expenditures will reach HK$317.2 billion this fiscal year, an increase of HK$26 billion, or 8.9 percent, compared with the previous year.

The expenditure includes HK$49.6 billion in infrastructure development. That will contribute to a deficit of HK$25.2 billion in the government's consolidated account, while fiscal reserves will be trimmed to HK$483 billion by end-March 2011.

Billy Mak, associate professor of finance and decision science at Hong Kong Baptist University, said it is possible for the government to record a surplus again next year, as the government's revenue still depends on uncontrollable factors, including investment income, stamp duties and land sales. "The government is usually more conservative, as they calculate the financial budget. They can allocate more money to the public, when the revenues are better than expected. However, they cannot increase the taxes immediately, when the revenues are worse than expected," he added.

(HK Edition 02/25/2010 page3)