HSBC 2009 Annual Report Download - page 17

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sector alike. Tight financing conditions as well as a
sharp fall in asset prices in some parts of the region
will also weigh on an expected increase in private
consumption levels.
Provided the external environment continues to
strengthen, regional non-commodity exporters such
as Egypt should see the recent downturn in demand
for tourism and trade services slowly reverse,
offering additional support for growth.
With most regional economies basing their
monetary regimes around a US dollar-peg, interest
rates are expected to remain at historically low levels
across much of the region in 2010. Coupled with
growth in government spending and gains in global
commodity prices, this may result in a rise in
inflation. After the sharp economic downturn of
2009, however, the increase in price pressure is
unlikely to be pronounced.
North America
In 2009, the economic backdrop in the US continued
to be characterised by tight credit conditions,
reduced economic growth and a weak housing
market. Against this, market confidence began to
increase, beginning in the second quarter of the year,
stemming largely from government initiatives to
restore faith in the capital markets, and the benefits
to borrowers of the prolonged period of low Federal
funds rates. The latter put pressure on spreads earned
on HSBC’s deposit base, however. As the disruption
to financial markets eased, evidence emerged of
contracting credit spreads and improved liquidity
during 2009, beginning in the second quarter of the
year, enabling many companies to issue debt and
raise new capital.
The reduction in uncertainty helped capital
markets to recover and stock markets to rise. Signs
of stabilisation in house prices, most notably in the
lower price ranges, began to emerge in the third
quarter of the year. An improvement in
unemployment and a sustained recovery in the
housing market continue to remain critical to
consumer confidence and a broader US economic
recovery. Although consumer confidence has
improved, it remains depressed on a historical basis,
driven by declines in household income and wealth
and the job market remaining difficult. It is likely
that these conditions will continue to constrain the
Group’s results into 2010, although the degree to
which this happens remains uncertain.
On 14 January 2010, the US Administration
announced its intention to propose a Financial Crisis
Responsibility Fee to be assessed against financial
institutions with more than US$50 billion on
consolidated assets for at least 10 years. It is not
possible to assess the financial impact of this
proposal, however, until final legislation has been
enacted.
Latin America
Economic activity in Latin America was affected by
the global economic recession in 2009. The region’s
weighted average GDP is expected to fall by 2.7 per
cent in the year, though growth may resume in 2010
given the outlook for world trade and a rebound in
economic activity. Unemployment rates in the region
rose in 2009 and it is probable that this trend will
continue, albeit at a slower pace as economies begin
to recover. Inflation fell due to falling commodity
prices and lower demand. These effects will begin to
reverse in 2010 and consequently inflation may rise.
HSBC is positioning itself to grow in select
customer markets, though challenges remain to
expanding business volumes. Margin pressures are
expected to continue throughout the region due to
fierce competition for prime customers and lower
interest rates than the historical averages. Any
further reduction in GDP and increase in
unemployment will negatively affect business
activity, compounded by uncertainty surrounding
presidential elections in Costa Rica, Colombia and
Brazil in 2010 and in Peru and Argentina in 2011.
Liquidity and funding risks are inherent in
HSBC’s business
HSBC’s business model is founded upon having
ready access to financial resources whenever
required to meet its obligations and grow its
business. To this end, HSBC entities seek to
maintain a diversified and stable funding base
comprising core retail and corporate customer
deposits and institutional balances, and certain
entities augment this with modest amounts of
long-term wholesale funding. In addition, HSBC
holds portfolios of highly liquid assets diversified
by currency and maturity to enable it to respond to
unusual liquidity requirements.
Where markets become illiquid, the value at
which financial instruments can be realised is highly
uncertain, and although processes are available to
estimate fair values, they require substantial
elements of judgement, assumptions and estimates
(which may change over time). The risk of
illiquidity, therefore, may reduce capital resources as
valuations decline. Actions or the threat of actions by
third parties and independent market participants,
such as rating agency downgrades of instruments to
which HSBC has exposure, can result in reduced