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Winners and losers of Hong Kong stimulus budget

The Hong Kong government last month announced a large stimulus package to turn around its ailing economy, which contracted by 1.2% in 2019. The autonomous city was rocked by months of anti-government protests last year and has been deeply affected by a downturn in the global economy, especially in mainland China, which last year saw its worst growth rate in 29 years.

All this comes as the city has undergone a semi-lockdown since January after the Covid-19, or coronavirus, outbreak began on the mainland. Many businesses closed down operations. Schools were shut for weeks. Many Hong Kong residents have chosen to self-isolate themselves.

Coronavirus outbreak taking its toll

This has been successful in stopping the spread of the virus. Fewer than 100 cases are reported in Hong Kong to date, despite the city bordering mainland China’s Guangdong Province, the second largest infected area after Hubei province. But it has taken its toll on Hong Kong’s economy, especially for its manufacturers and tourism sector.

Hong Kong authorities hope consumption and production will soar once the semi-quarantine of the entire city ends. And the IMF reckons that Hong Kong’s economy could grow this year, albeit by only around 1%, as per its forecast in December, buoyed by strong consumer spending.

Hong Kong stimulus package to boost economy

To entice consumption, the Hong Kong government announced in late February that every permanent resident aged above 18 years old will receive a cash handout of around $1,200. This is part of a stimulus package intended to spur economic growth.

The government will also provide businesses with tax holidays, raise allowances for lower-income households, and set aside roughly $90 million to subsidize the ailing tourism sector, which has been severely affected by the Covid-19 outbreak.

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This stimulus package is expected to cost the city authorities $15.4 billion overall, roughly a tenth of its current fiscal reserves. It means the budget for 2020/21 will first in deficit for 15 years.

Deeper concerns for Hong Kong’s economy

But longer-term problems loom, most out of Hong Kong’s control. The US-China trade war, which eased in January after phase one negotiations between Washington and Beijing, could relight this year. Especially around the time of the US presidential elections in November.

Hong Kong’s main export destination in mainland China, and the vast majority of its imports – 42% last year – came from the mainland. Yet Beijing’s grasp on its economy is also failing, with the IMF projecting that China’s economy might only grow by 5.6% this year, a rosy estimate compared to other economists. This too will severely weaken Hong Kong’s economy.

But Hong Kong can control certain economic factors. Clearly, there is also a political angle to the latest stimulus budget. After anti-government protests escalated into street battles last year, and pro-democracy sentiment remains high, more state handouts are likely to ease tensions.

Budget deficits the new normal?

In December, the IMF praised Hong Kong for “a history of prudent macroeconomic policies,” with its large fiscal reserves and international investment positions providing it with a buffer to “address both cyclical and structural challenges.”

Most forecasts were made before the Covid-19 outbreak began, and if it continues for much longer, Hong Kong could yet again face contraction. Some warn – another major stimulus package might be needed for next year’s state budget, making budget deficits the new normal.

This raises questions about the government’s fiscal responsibility. Fiscal reserves currently account for 22 months of government expenditure. But at the current rate of state spending – rising from $20 billion in 1997 to almost $64 billion last year – Hong Kong’s reserves could fall to the equivalent of just 15 months of expenditure by 2024.

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