II. Possible Consequences

Worsening of the Investment Environment

42. As I said earlier, we must ensure our economy returns to growth by adopting proactive steps to attract foreign investment and retain domestic investment. These investors pay close attention to our credit ratings, which take into account the Government's fiscal position. In making their assessments, international rating agencies mainly focus on the outlook for revenue and expenditure, especially in the recurrent account. Recently, Standard & Poor's announced that it would downgrade its outlook for Hong Kong's long-term local currency credit rating from stable to negative. This, in effect, is a warning that this rating will be downgraded if the fiscal deficit does not improve in the future. A downgraded rating will inevitably have an adverse effect on both the public and private sectors, resulting in higher financing costs. This would lead to a worsening investment environment and a general erosion of the attractiveness of Hong Kong to foreign investors. We cannot overlook the importance of maintaining a favourable investment environment which is crucial to our economic recovery and restructuring.

Impact on the Financial Markets

43. Our fiscal deficit has already attracted attention in international markets and the local financial market is becoming increasingly concerned. To maintain financial stability, we need to put in place sound and comprehensive fiscal policies, make continuous efforts to improve the regulation of our market mechanisms and have the backing of strong fiscal reserves. The Asian financial crisis amply demonstrated the need for these safeguards. The current deficit is serious and is threatening to undermine our financial strength and market confidence. If the problem is not solved as soon as possible, Hong Kong risks being exposed to heightened speculation, which may trigger outflows of capital, rising interest rates, turmoil in the financial markets leading ultimately to possible attacks on our linked exchange rate system.

44. Our investment environment and the financial markets are the cornerstones of our economic development. They are the foundations upon which we can build successful economic restructuring. Any failure to address the worsening fiscal deficit will definitely hinder Hong Kong's economic recovery. To address our problems we must, as a priority, resolve the fiscal deficit. I believe all sectors of the community have come to realise the gravity of the situation and many have put forward constructive suggestions. There have been many calls for the Government to join forces with the community to seek an early and thorough solution. I have the responsibility, confidence and determination to take all necessary steps to progressively achieve fiscal balance within five years. We will proceed on the basis of a community consensus on responsibility sharing, fairness and reasonableness.