Addressing the 60-seat legislature, he said: ``The Hong Kong economy has bottomed but because of the need to adjust, it is my estimate the economy will remain there for some time.''

He said vital to economic recovery were lower interest rates, stable property prices and predictable external economic forces.

``The interest rates have gone down, property prices are stabilising but external factors remain out of our control,'' Tung said in his first question and answer period of the year.

Hong Kong was in an economic boom before Asia's financial crisis swept through the territory, just after it returned to China in July 1997 following 156 years of British rule.

Tung said Brazil's devaluation on Wednesday was a reminder that external forces could shatter any forecasts for recovery.

Tung said he would review the territory's civil service in 1999, including making provisions for better equipment, ensuring pay was in line with the private sector and setting up a reward and punishment system for better results.

The civil service has been accused of incompetence over an array of problems since Tung took the helm.

But Tung rejected recent suggestions that he should adopt a ministerial-style government, in which political appointees could be held accountable for the performance of their departments.

Tung said Hong Kong's deflation was no cause for concern and would help the economy adjust and become more competitive. This will help the present economic adjustment process, Tung said.

Consumer prices fell 0.9 per cent year-on-year in November and 0.1 per cent year-on-year in October -- the first time in 23 years that the overall index has been in negative territory.

It was only Tung's fourth question and answer period in the legislature since he took office and there were some embarrassing moments for the leader who has been accused of being aloof.

Opposition Democratic Party legislator Andrew Cheng said he was ``dictatorial'' and ``indecisive,'' and asked him if he was ``moving further and further away from the public.''

``You look like you are listening but in fact you are rather dictatorial,'' Cheng said. Cheng's attacks were prompted by Tung's decision in October to abolish two locally elected councils.

Cheng also slammed Tung for defending a decision by the Mass Transit Railway Corp this week to lay off about 80 staff because of the poor economic climate.

``No,'' a weary looking Tung replied. ``I don't think I am removed from the public. I talk to people from a lot of sectors. We have to decide what we do for the good of Hong Kong's long- term interests.''

But he acknowledged Hong Kong's jobless rate, at the highest level on record,

``The unemployment rate is at 5.5 per cent. It is possible it will go up even further and that's an unfortunate fact,'' he said.