S&P: The improvement in Hong Kong's public finances is sufficient to support the massive infrastructure plan

S&P Global stated that Hong Kong's public financial situation is currently more robust and capable of supporting its large infrastructure plans. According to the latest estimates, driven by steady economic growth and stock market trading, Hong Kong's operating accounts for the latest fiscal year 2025 (ending March 2026) have recorded a surplus ahead of schedule. However, even without considering bond issuance, S&P Global still expects a deficit of about 3% of local GDP for the fiscal year 2025, and about 2% for the fiscal year 2026, mainly due to the government's anticipated large expenditures on the Northern Metropolis project.

S&P noted that the latest Budget shows changes in Hong Kong's fiscal revenue structure. Although land sales have performed poorly for many years, leading to a further decline in land revenue last year, which accounted for less than 3% of total revenue in fiscal year 2025. Nevertheless, even without land revenue support, Hong Kong's operating accounts have returned to surplus thanks to strong profits tax revenue and active stock market activities, indicating that even if land sales do not fully recover, the likelihood of further erosion of the government's financial situation is low.

In addition, amid ongoing instability in Sino-U.S. relations, the trend of Chinese enterprises seeking to list in Hong Kong has driven a strong increase in the number of IPO projects. S&P expects this trend to continue to drive stamp duty performance strongly in the fiscal year 2026. The Budget proposed increasing investments in digital finance, artificial intelligence, and intellectual property transactions, which is expected to support economic activities and increase revenue.

Even though S&P expects the Hong Kong government's operating surplus, due to the government's plan to invest large amounts of capital in the Northern Metropolis, it is anticipated that Hong Kong's overall fiscal balance will remain in deficit. However, it is expected that from fiscal years 2026 to 2029, the average overall fiscal deficit rate will decrease to 1.8%, significantly lower than the average of 6.2% recorded in fiscal years 2022 to 2024, mainly benefiting from increased operating surpluses and measures taken by the government to mitigate the impact of the substantial expenditures on the Northern Metropolis project.

It is noteworthy that, due to the recovery of operating accounts to surplus, the trend of decreasing government financial reserves may have reversed. S&P expects that Hong Kong's fiscal savings will begin to increase by the end of the fiscal year 2025, marking the first increase since the fiscal year 2021. If this trend continues, even in the face of substantial capital expenditures, it should continue to provide financial support for S&P's rating of the Hong Kong government