The Hong Kong SAR's fifth anniversary Establishment Day celebrations and the swearing-in of the Chief Executive's new group of principal officials overshadowed most other local news developments in late-June, early-July.

As a result, it is hardly surprising then that some informative statistics issued during the period received only cursory attention in the public domain.

Two of these sets of statistics were new and important and generally positive for the SAR.

These were Hong Kong's International Investment Position for 2000 and 2001 (issued on June 21) and Hong Kong's External Debt Statistics for the First Quarter of 2002 (issued on June 24).

The "bottom line" is that the first set of figures showed the Hong Kong SAR Inc. with a positive net foreign investment position of HK$2,123.1 billion (US$272 billion).

For the second set of figures the "bottom line" is that the SAR's gross (as opposed to net) external debt (all non-government) was HK$2,807.9 billion (US$360 billion) as of March this year.

The third set of figures was the usual monthly Government Budget balance statement for May (issued on June 29) and therefore the first two months of the fiscal year (April and May) and these, as expected, were not so positive.

To take the Budget balance first. The SAR Government's financial results for the first two months of the 2002-03 fiscal year revealed a Budget deficit of HK$14.62 billion in April-May.

That makes it the worst beginning to the fiscal year since 1999-2000, when the economy was beginning its recovery from the impact of the East Asian financial crisis of 1997-98.

The HK$14.62 billion deficit for the two months compares with HK$17.92 billion in opening two months of 1999-2000, HK$7.07 billion in the same two months of fiscal 2000-01, and HK$13.14 billion in the opening two months of last year (2001-02).

Although the worst of those years, 1999-2000, did eventually produce a modest full year surplus (HK$9.94 billion), it was when the economy was temporarily recovering, not the uncertainties that are still apparent today, both globally and locally.

Both the 2000-01 and 2001-02 fiscal years eventually produced deficits (HK$7.81 billion and a massive HK$63.32 billion respectively), as did the 1997-98 year (HK$23.27 billion).

The government is right to point out that "a deficit in the initial months of a financial year was not unusual as many major types of revenue including taxes were mostly received towards the end of a financial year."

However, a year in which only a modest economic recovery is forecast, cannot be expected to produce the revenues the government needs to fund present spending.

Significantly, revenue in the opening two months of the current fiscal year was down 3.2 per cent to HK$23.43 billion, while expenditure increased 1.9 per cent to HK$38.05 billion.

Given current economic conditions -- the still uncertain economic outlook and a lacklustre revenue performance -- the need for spending restraint is clear, even with the government prepared for a HK$45.2 billion deficit in the full 2002-03 year.

More positive for the SAR were Hong Kong's international investment position (IIP) statistics -- the stock of external financial assets and liabilities of an economy -- for 2000 and 2001, issued for the first time on June 21.

At the end of 2001, Hong Kong's external financial assets -- effectively what Hong Kong Inc. owns overseas -- totalled HK$8,487.8 billion (US$1,088.2 billion) and liabilities -- what Hong Kong Inc, owes -- were HK$6,364.6 billion (US$816.0 billion).

Hong Kong was, therefore, a net investor in the rest of the world, with a positive balance on external financial assets of HK$2,123.1 billion (US$272.0 billion) at the end of last year, equivalent to 168.2 per cent of gross domestic product (GDP). (Detailed figures are shown in the accompanying table).

As the government pointed out, these substantial figures again reinforced the fact that the SAR is a highly externally oriented economy with considerable cross-territory investment and also a major financial centre in the region with considerable cross-territory fund positions.

Of the main broad IIP asset components -- Portfolio Investment (PI) and Other Investment (OI) and Direct Investment (DI) -- only DI was in negative balance. This meant the amount of DI made by non-residents in Hong Kong was therefore greater than that made by Hong Kong residents abroad.

As for the other two asset components, investment in Financial Derivatives (FD) was very small, while Reserve Assets (RA) is purely a government item.

It can be seen that other investment IIP component at the end of 2001, accounting for 35.7 per cent and reflecting the SAR's role as an international banking centre in channelling funds to the rest of the world.

Direct Investment was the second largest component at 33.1 per cent of the total, emphasising Hong Kong's position as a major external direct investor to the rest of the world, notably in the Mainland of China.

It also reflects the common practice of setting up non-operating companies in offshore centres such as British Virgin Islands and Bermuda by Hong Kong enterprises for channelling DI funds back to Hong Kong or to other places.

Portfolio investment accounted for 19.3 per cent, with 54.8 per cent being in debt securities and 45.2 per cent in equities. Reserve assets accounted for 10.2 per cent and financial derivatives just 1.7 per cent,

Comparing end-2001 with end-2000, total external financial assets declined by 4.6 per cent or HK$411.5 billion, but the net position was up HK$393.6 billion.

On the liabilities side of the balance sheet, 52.6 per cent were in direct investment, indicating the prominent position of non-resident enterprises locally, although some was due to "round-tripping" of investment out of Hong Kong and back again.

Other investment liabilities accounted for 31.5 per cent of the total and again were mostly related to deposits and loans of the banking sector. Portfolio liabilities accounted for 14.6 (mainly equities with an 86.4 per cent share) and derivatives accounted for just 1.43 per cent.

Total external financial liabilities at the end of 2001 fell by 11.2 per cent compared with a year earlier.

A government spokesman noted the sound nature of Hong Kong's international investment position, with net external financial assets compared favourably with the latest net external financial asset positions of the rich G-7 economies.

He added that while both external financial assets and liabilities declined during 2001, along with the global economic downturn, assets had declined less than liabilities, meaning net assets went up by 22.8 per cent over the year.

Hong Kong's External Debt (ED) Statistics for the First Quarter of 2002, also published for the first time, showed a similar strong position to the international investment position figures IIP.

At end-March 2002, Hong Kong's gross external debt measuring the total outstanding gross external liabilities other than equity liabilities, amounted to HK$2,807.9 billion (US$360 billion), equivalent to 223.3 per cent of GDP.

The large external liabilities of the banking sector were mostly in the form of inter-bank placements from overseas banks, which reflected the "intermediation" role of Hong Kong as an international financial centre.

For the private non-bank sector, the level of external debt other than direct investment was low, indicating that it generally did not rely too much on external borrowing as a source of finance.

Ian K Perkin is the Chief Economist of the Chamber. He can be reached at perkin@chamber.org.hk