Are Hong Kong's economic prospects improving? Just ask Moody's Investors Service, the World Bank or Hong Kong's own Dickson Concepts. Moody's has raised the rating on Hong Kong's foreign currency debt, while the World Bank has lifted its full-year growth forecast for the city to 2.1 per cent. Dickson Concepts has announced plans to set up a Hong Kong branch of its high-end Harvey Nichols retail chain. These disparate groups are acting on reliable data, and in Hong Kong's case, this data paints an economic picture drastically different from the one we saw just six months ago. Retail sales are starting to grow again, property market activity has perked up and visitors are coming back in numbers last seen before the Sars outbreak. The rapid recovery is proof of what Moody's calls 'a high degree of adaptability to changing external conditions'. As an entrepot economy with a limited home market, Hong Kong companies are in the business of adapting to external conditions and catering to needs outside their home base. With Japan and the US showing improved economic prospects, the city looks set to benefit from expanding global demand. That Hong Kong has been granted a higher credit rating than the mainland is a recognition of the differences between the two economies. Hong Kong has no net public debt and limited liabilities, while the mainland's vast economy is going through convulsive restructuring that is demanding huge pump-priming to keep growth on track. In Hong Kong, pent-up consumption demand and the arrival of more big-spending tourists mean the retail and restaurant sectors have more upside to look forward to. It is significant that the recovery - which seems to be only just beginning, if the forecasts of 4 to 5 per cent growth next year are to be believed - has got under way even as Hong Kong remains mired in controversy over the pace of democratisation and the handling of the Sars outbreak. The administrative and economic systems are strong enough to withstand events which could easily shake other economies to the core. The outside world's confidence in Hong Kong's economy does not seem to have been irreversibly damaged, and credit has to be given to the sound financial, legal and government institutions. Bullish assessments of Hong Kong's prospects are closely tied a global rebound. As such, they are a best-case scenario. What should not be forgotten is that our public finances remain severely out of kilter and a positive rating could be sharply reversed should gaping fiscal deficits - which we should remember have been deemed structural in nature - are not resolved. A false sense of security must be avoided lest the advantages of a positive perception be frittered away.