Hong Kong's $63.9b budget surplus sign of fiscal prudence: Moody's

It also shows finances' slower growth resistance.

John Tsang, Hong Kong’s financial secretary, recently announced that the government’s budget surplus will be HKD63.9 billion ($8.2 billion), or 2.8% of GDP, for the fiscal year ending 31 March 2015, and HKD36.8 billion ($4.7 billion) in fiscal 2016.

According to a research note from Moody's Investors Service, the fiscal 2015 budget surplus is credit positive because it demonstrates government finances’ resistance to the effects of slower growth and political protests last year.

It also adds to fiscal reserves that the government can use to address emerging growth challenges.

The lower surplus projected for fiscal 2016 acknowledges those challenges, and incorporates incentives for consumption and investment to counter those challenges.

The fiscal 2015 surplus outperformed last year’s target despite slower GDP growth of 2.3% in 2014, versus 2.9% in 2013. Authorities received higher-than-expected revenues from property transaction fees and taxes on salaries and profits.

Government expenditures were also lower than projected in the budget last year. Because of its conservative fiscal forecasting and vigilant fiscal management, the government often surpasses its budget targets and has a record of consistent annual surpluses.

Here's more from Moody's Investors Service:

Budget surpluses over the past decade have built up fiscal reserves that will total HKD819.6 billion ($105.6 billion) by the end of March 2015. These reserves equal more than 7x the government’s total debt, and would cover almost two years of government expenditures.

Such sizable reserves offset challenges to Hong Kong’s credit quality from uncertain global financial conditions, likely slower growth in China and an aging population. They provide authorities with the ability to initiate measures that increase spending and lower revenue to improve future growth.

The fiscal 2016 budget used some of this fiscal space for counter-cyclical measures (tax incentives and social spending) to support consumption and investment over the next year.

In addition, the budget targeted benefits to the retail and tourism sectors to ameliorate the setbacks they faced during recent political protests. The budget also included measures to diversify and raise longer term investment in sectors such technology, financial services and the cultural and creative fields.

Mr. Tsang reiterated his support for Hong Kong’s proposed Future Fund, which will use a portion of reserves and surpluses to inject investment into the economy and generate returns for the government, particularly beyond five years, when an aging population will make fiscal management more difficult.

The share of Hong Kong’s population aged 65 and above will rise to 26.5% in 2030 from 15% currently, according to our forecasts. The decline in Hong Kong’s working age population will likely have negative effects on savings and investment rates, and increase fiscal pressure through lower revenue growth and higher social welfare spending.

Future Fund investments could mitigate these pressures. However, until there is more clarity around investment plans, it is difficult to estimate the extent to which they will.

Income and property market trends in 2015 will determine whether the fiscal 2016 budget surplus will again outperform targets. Fiscal surpluses support Hong Kong’s credit quality, but fiscal policy success will also be measured by how effectively it incentivizes growth and competitiveness.