Hong Kong boosts budget to fight virus, effectiveness questioned

Hong Kong unveiled a record-high budget deficit on Wednesday, as it boosted cash handouts to residents and tax concessions for companies to cushion the shock of often-violent protests and the outbreak of a coronavirus on the recession-hit economy.

The measures are aimed at supporting households and businesses that have suffered the economic fallout of the coronavirus, but may not reverse the long-term slide in growth as the city struggles with anti-government protests, analysts said.

“People are worried to do shopping because of the coronavirus, and after the epidemic is gone there is a high chance that violent protests will return. These two factors will make the tax concessions and cash handouts ineffective to boost consumption,” Iris Pang, economist for Greater China at ING, told Al Jazeera.

But “the tax concessions and other relief measures on paying wages to empire can stabilise the job market a bit,” Pang said in an email.

Finance Secretary Paul Chan announced relief measures worth 120 billion Hong Kong dollars ($15.4bn) on Wednesday, which dragged Hong Kong’s budget into its first budget deficit in 15 years at 37.8 billion Hong Kong dollars ($4.85bn), or about 1.3 percent of gross domestic product (GDP) for the 2019-20 fiscal year.

The relief measures were largely comprised of one-off payments, including handouts of 10,000 Hong Kong dollars ($1,284) to Hong Kong residents aged over 18, tax breaks for firms, and other subsidies.

Chan said he expected deficits for the next five years.

The 2019-2020 budget included more than 30 billion Hong Kong dollars ($3.85bn) to cushion the hit from the protests, which saw activists and police clashing in shopping malls and the financial district. It also included 30 billion Hong Kong dollars ($3.85bn) in recently announced handouts for health authorities, small and medium-sized firms and low-income residents.

The economy has been in recession for at least three quarters and many companies in tourism and retail are struggling to survive as a partial closure of the border reduces visitors to a trickle and keeps residents away from public areas.

“Whether this stimulus will be sufficient to pull Hong Kong SAR out of the recession that commenced in 2019 will depend on the severity and duration of the COVID-19 epidemic,” Rajiv Biswas, APAC Chief Economist at IHS Markit told Al Jazeera.

For the 2020-2021 fiscal year, Chan expected a budget deficit of 4.8 percent of GDP or 139.1 billion Hong Kong dollars ($17.86bn), a record value in nominal terms. In 2003 and 2004, when Hong Kong faced a recession caused by an outbreak of severe acute respiratory syndrome (SARS), the budget deficit reached 5.3 percent of GDP, according to ANZ analysts.

The shortfall, which was larger than most analyst forecasts, accounts for lower revenues and the relief measures.

“While the stimulus measures do provide a significant boost to ordinary households through substantial new grants and tax rebates, the collapse of Chinese tourism and new orders is a substantial external shock to the Hong Kong economy,” Biswas said.

Ample reserves

Hong Kong usually runs balanced budgets or surpluses, since its pegged currency system commits it to fiscal prudence. Its ample fiscal reserves, however, allow it to run annual budget deficits during periods of economic headwinds.

Chan said while public spending was large, current circumstances were unique and the payouts would not impose a long-term fiscal burden.

Fiscal reserves are estimated at 937.1 billion Hong Kong dollars ($120.28bn) by the end of March 2025, down from 1.1 trillion Hong Kong dollars ($141.19bn) expected in March 2020, a drop that leaves economists relaxed about the peg system.

The Hang Seng Index was down 0.6 percent, performing worse than mainland shares but outpacing much of Asia. The Hong Kong dollar firmed slightly to 7.7890 per US dollar.

Chan forecast the 2020 GDP would range between a contraction of 1.5 percent and growth of 0.5 percent. For all of 2019, the economy contracted by 1.2 percent, its first annual decline since 2009.

The first quarter of 2020, when Hong Kong recorded its first coronavirus patients, is expected to be even worse.

Analysts predict the coronavirus will cut 1 or 2 percentage points off first-quarter growth while the contraction for 2020 may be larger than last year’s, depending on the intensity of the outbreak.

“It’s quite unlikely that Hong Kong can get out of recession because of this budget,” said Natixis economist Gary Ng, who predicts a 5 percent GDP contraction this quarter, and a 3 percent drop for the whole year.

“Because of the weak consumer sentiment, we are not expecting the handout to channel fully into GDP growth.”

With additional reporting by Samantha Ho in Kuala Lumpur