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Natixis: Hong Kong budget: throwing untargeted cash will not solve a well-defined problem

Hong Kong has enjoyed 15 years of fiscal surplus but it started to run a deficit from last year. More than the mini-stimulus announced previously, which was limited and belated, the deficit has been a consequence of the plummeting growth. The economy contracted by 1.2% in 2019, and this year will most likely be the same, if not worse.

This year’s budget includes a large stimulus. The headline relief measures amount to HKD 120 bn (4.2% of GDP) with HKD 71 bn (2.5% of GDP) handed out as cash. As such, the fiscal deficit may reach 4.8% of GDP based on the official growth forecast, which is very optimistic (-1.5% to 0.5% YoY in 2020).

The best part of the budget is the amount is no longer small as in past packages announced bit by bit since August 2019. But the problem is the stimulus is untargeted and regressive in nature as the bulk of money spent is a one-off cash disbursement per adult, independently on income or damage from the coronavirus. The same amount targeted to SMEs in the most hit sectors could have a bigger impact on household income as it might help protecting their jobs or ease their burden directly. Furthermore, the one-off nature of the cash handout also increases the likelihood of having this stimulus leaving Hong Kong rather than being used for consumption. Beyond the risk of saving over spending, it is plausible that the money may be taken overseas. In macro-economic terms, this equates to burning fiscal space and potentially feed capital outflows. In fact, a monthly subsidy targeted at consumption would ease this concern.

Looking at the revenue side of the budget, the high reliance on land related income may pose risks if there is any large downfall in the property market. This is particularly important as fiscal expenditure is bound to increase in Hong Kong on a structural basis due to aging demographics and the surge in healthcare costs.

Finally, what really matters for Hong Kong’s fiscal situation is economic activity. If Hong Kong remains in recession as we expect (-5% YoY in Q1 2020 and -3% YoY in 2020), the fiscal deficit could further widen. Down the road, it all depends on Hong Kong keeping its competitive edge, which looks increasingly difficult as no major measures have been announced by the government in future direction but only relief.

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