Hong Kong budget seeks to deploy its considerable fiscal buffers to cushion the economic impact on households and businesses as the city pursues a so-called dynamic”zero infection policy with a range of social restrictions, said Fitch Ratings recently.
The territory’s large fiscal reserve means the anticipated widening of the deficit this year is unlikely to have adverse implications for Hong Kong’s ‘AA-’ rating, Fitch pointed out.
However, in the absence of a clear exit strategy from the current “dynamic zero” approach, which will require recurring waves of business and mobility disruption, Hong Kong may run the risk of longer-term economic scarring that could ultimately weigh on its credit profile, the credit rating agency warned.
Restrictions on social gatherings and service-sector activity have hit new highs in recent weeks, as the city grapples with its largest Covid-19 outbreak since the start of the pandemic.
Officials have extended flight bans on nine countries, tightened restrictions further on in-person services, and raised fines for breaching controls on public gatherings.
Zero covid strategy curb economic growth to 1.5%
Against this backdrop, which Fitch believes will curb economic growth to just 1.5% this year, the authorities unveiled their annual budget recently.
Fitch estimates the deficit will widen to 3% of GDP during the fiscal year ending March 2023 (FY22), excluding bond proceeds, after a significant narrowing in FY21 to 0.6%, due largely to improved land sales and profits tax receipts.
The government estimates that counter-cyclical measures will total HK$170 billion or US$21.8 billion (6% of GDP) in FY22, up from HK$120 billion (HK$15.4 billion) in the FY21 Hong Kong budget.
The largest measure is a new consumption voucher scheme, worth HK$10,000 (US$1280) per eligible resident - double the amount issued last year.
Other relief includes a reduction in salaries tax, extensions to one-off schemes, and about HK$62 billion (US$7.9 billion) of small and medium-sized enterprise financing guarantees.
The latter should provide short-term relief to borrowers, Fitch said, adding that its expectation for the banking sector to maintain a broadly stable impaired-loan ratio this year could be at risk if activity restrictions cause a rise in business closures.
According to the firm, its FY22 budget deficit forecast of 3% is high compared with the territory’s long record of surpluses, but is close to the median for ‘AA’ rated sovereigns.
The fiscal reserve also remains substantial, at more than 30% of GDP, Fitch added.
Assuming pandemic restrictions ease, Fitch expects that the budget will revert to a small surplus next year as the economy recovers.
Hong Kong’s rating is, however, sensitive to a decline in economic competitiveness, according to the company.
Zero covid strategy may erode Hong Kong's hallmark strengths
The territory’s positioning as a globally connected centre for finance and commerce means that sustained isolation from the rest of the world under a “zero Covid” strategy aimed at reviving cross-border connectivity with the mainland may end up eroding some of its hallmark strengths, Fitch warned.
Tight restrictions on international travel coupled with disruption to business operations from policies aimed to prevent the spread of Covid-19, in addition to their near-term economic impact, may diminish the territory’s attractiveness as a regional headquarters for foreign multinationals, the firm added.
The economic impact of some diversion of foreign multinational business operations could be offset by a rising presence of mainland Chinese firms, Fitch predicted.
The budget puts additional fiscal resources behind efforts to position Hong Kong within China’s national development plans, and enhance its connectivity with the southern cities of China’s Greater Bay Area, the company observed.
However, it is not a given that mainland firms will increase their footprint in the territory on a scale that will have an impact on the labour market, Fitch said.
Even if they do, Hong Kong’s economy may become less diversified if it grows even more reliant on financial services, the firm added.