problems from iraq, uncertainties about possible tensions between the united states and iran, production uncertainties in nigeria, the continuing problems experienced between the russian government and the yukos oil company, management and trade union tensions in norway and the damage to production which was caused by hurricane ivan in the gulf of mexico. although some of the developments mentioned above are significant, it would, however, seem to us that the oil market players are running ahead of themselves in terms of pricing. time and again, the largest producer of oil in the world, the kingdom of saudi arabia, has made it known that there are sufficient reserves and capacity to ensure that global supply meets demand. on many occasions, the kingdom of saudi arabia has actually increased supply by no less than a million barrels per day. they have indicated that there are sufficient reserves for the next 50 years. and as stability returns in any troubled oil - producing country, supply surely should be guaranteed. it is maybe time for the market to pause and reflect on the perceived supply constraints. certainly, the global economy expects no less from the oil market. despite these risks for the global economy now and in the recent past, substantial global economic growth has been recorded in 2003 and prospects for the whole of 2004 look promising. the global economy recorded an impressive 3. 9 % growth in 2003, with the united states, japan, india, china and many emerging market economies making the most impressive contribution to global growth. 1 / 5 growth rates in china and india remained the envy of all countries in 2003. although the chinese authorities attempted to slow down growth in their country, at growth rates of around 9 %, this country continues to amaze. it is forecast that global growth in 2004 is likely to be in the region of 5 %, slowing down somewhat in 2005 to 4, 3 %. based on these forecasts, we can safely say, without any fear of contradiction, that the world economy is still in a good state of growth. the oil price notwithstanding, the global economy has shown itself to be resilient in the face of so many other constraints. there remain, however, a number of challenges to be tackled if the world economy is to improve further in the medium to long term. at the most recent g20 meeting in berlin on 20 and 21 november 2004, the challenges to global growth were summarised as follows : “ the united states needed to urgently address its fiscal and current account deficits which are resulting in major negative adjustments in other parts of

decline has been accommodated without major incident. mortgage delinquencies have edged up, but they remain below the typical levels in industrial countries, and the banks remain highly capitalised and profitable. equally important, property prices have dropped quickly to levels consistent with underlying supply and demand. as a result, markets have remained liquid, and activity has recently picked up. there is a renewed sense of optimism that, whatever adjustments remain to be worked out, the worst is now over. in labour markets, wage freezes are the norm, combined in many cases with cuts in bonuses in sectors that have been most affected by the crisis. nominal wages are likely to show little, if any, growth this year, compared with increases of 7 - 8 % in the period leading up to the crisis. price inflation has also dropped markedly, and has turned negative in recent months. price reductions inevitably cause short - run dislocations. but they are a key channel of adjustment for hong kong, and the improvements in our competitiveness that result will set the stage for a sound recovery. the important consideration is that this process should be completed quickly, and there is every indication that it will be. a few critics maintain that we should have ‘ let the link go ’ during the crisis to allow nominal exchange rate depreciation to restore our competitiveness. i believe that such a step would have been fraught with risks. any direct impact on growth would almost certainly have been offset by reduced confidence in our longer - term policy direction and heightened anxieties about the short - term impact on the financial and corporate sectors. i do not need to remind you that hong kong did not suffer from the structural problems in these sectors that have been ascribed to some other economies. but there is no guarantee that major and lasting damage would not have been done by the types of dramatic exchange rate overshooting that have been witnessed elsewhere in the region. and it is unrealistic to expect that exchange rates would not have overshot, given hong kong ’ s openness and exposure to international capital flows. if hong kong ’ s peg had been abandoned last year, it is likely that the attacks on other regional currencies would have been even more dramatic and widespread, with negative feedback on the region and on our own performance. that asia — including hong kong — now appears to be entering a recovery phase was by no means assured twelve months ago. we might well wonder what conditions we could now be facing had the crisis proceeded to yet another