Tuesday, 20 Oct 2020

Hong Kong urged to boost stimulus using fiscal war chest

HONG KONG (BLOOMBERG) – Hong Kong’s government is drawing fresh criticism from economists and business advocates who say a third round of virus relief stimulus doesn’t go far enough.

While Chief Executive Carrie Lam’s latest spending plan will draw from the city’s fiscal reserve of HK$976.6 billion (S$170.9 billion) in July, that cash pile is still seen by economists as large enough to support still more stimulus.

The urgency for more fiscal support was underscored on Thursday (Sept 17) by data showing Hong Kong’s unemployment rate sitting at 6.1 per cent in August, with joblessness continuing to rise in the hard-hit consumption and tourism sectors. Underemployment also increased, to 3.8 per cent from 3.5 per cent in the earlier period. Yet the latest signals from Mrs Lam’s administration, including the comparatively small round of virus relief announced this week, suggest a reluctance to further deplete Hong Kong’s war chest.

“Stimulus has been smaller than expected so far,” said Alicia Garcia Herrero, chief economist for Asia Pacific with Natixis SA. “More – and more clever stimulus – is needed.”

Hong Kong faces a particularly difficult road to recovery after a year of political unrest and more than seven months of coping with the coronavirus outbreak. It’s posted quarterly economic contractions of as deep as 9 per cent so far this year, with restrictions to combat the virus, the US-China trade fight and political tensions all weighing on its status as a global financial hub.

The HK$24 billion package Mrs Lam just announced, a fraction of the previous rounds, underscores the tricky balancing act governments are attempting as the pandemic drags on, as they try to provide badly needed relief for residents and businesses while trying not to significantly worsen public finances.

“The size of the latest package is relatively small, and only less than half of it goes to supporting employment and businesses,” said Tommy Wu, senior economist with Oxford Economics in Hong Kong.

“As many households and businesses are still under immense pressure, it is not the time for the government to worry about drawing down the fiscal reserves to support the economy.”

The latest stimulus pushes relief spending to more than HK$310 billion this year. Mrs Lam in August described Hong Kong’s public finances as “in a severe situation,” adding she would be offering few measures in her Oct 14 policy address that would draw on public coffers.

The Hong Kong economy, which contracted 1.2 per cent last year, is expected to shrink by a record 6.9 per cent this year, according to an economists’ survey by Bloomberg conducted in the first week of September.

“This round of stimulus is much narrower than the last round. It’s completely insufficient to cover our pains,” said Yiu Si-wing, a Hong Kong lawmaker representing the tourism industry, which has been decimated by the virus.

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