Emerging

The Covid-19 crisis worsens the ongoing recession

EcoEmerging// 2nd quarter 2020  
17  
economic-research.bnpparibas.com  
Hong Kong  
The Covid-19 crisis worsens the ongoing recession  
The Covid-19 pandemic strikes an economy that has already been weakened by several quarters of decline in merchandise exports,  
tourism, private consumption and investment. Since February, the government has launched a major fiscal stimulus plan  
representing about 10% of GDP. The plan includes direct support measures in favour of corporates and households. Additional  
structural measures will be needed going forward, in order to fuel a sustainable rebound in private demand and bolster medium-  
term economic growth prospects. Thanks to abundant fiscal reserves and minimal debt, the government has comfortable  
manoeuvring room to pursue an expansionist policy for several years to come.  
Another rude test  
1
- Forecasts  
Economic growth has plummeted over the past two years. It  
dropped from 4% year-on-year (y/y) in H1 2018 to 1.9% in H2 2018  
and 0.6% in H1 2019, before contracting by 2.8% in H2 2019. In  
Q1 2020, Hong Kong is expected to report its fourth consecutive  
quarter of negative quarterly growth in real GDP. The recession is  
likely to extend into the second quarter. Once the international  
environment improves, economic activity should begin to recover  
gradually, supported by stronger growth in mainland China and a  
major fiscal stimulus plan. Yet it could also continue to be hampered  
by persistently sluggish private-sector demand.  
2
018  
2019  
-1.2  
2.9  
2020e  
-2.5  
2021e  
3.9  
Real GDP growth (%)  
2.9  
2.4  
2.4  
3.7  
Inflation (CPI, year average, %)  
Budget balance / GDP (%)  
Current account balance / GDP (%)  
2.1  
2.4  
-1.3  
3.5  
-10.0  
2.5  
-5.8  
3.0  
* Fiscal Year from April 1st of year N to March 31st of year N+1  
e: BNP Paribas Group Economic Research estimates and forecasts  
2- Tourist arrivals and retail sales: free fall  
In 2019, and certainly also in Q1 2020, the contraction in real GDP  
was due to the sharp decline in both domestic demand (excluding  
public spending) and exports of goods and services. Private  
consumption plummeted in H2 2019 (-3.1% y/y, compared to +0.9%  
in H1 and +5.4% in 2018), disrupted by protest movements, the  
sharp decline in tourism inflows and the deterioration of the labour  
market. The situation abruptly worsened in February after  
confinement measures were enforced in mainland China and Hong  
Kong. Between August 2019 and January 2020, retail sales fell by  
more than 20% y/y each month, before collapsing by 47% in  
February (chart 2). Tourist inflows dropped to fewer than 200,000  
visitors in February whereas Hong Kong still hosted 3.2 million  
visitors a month on average between August 2019 and January  
Retail sales volumes (y/y,%, LHS)  
Visitor arrivals per month (mns, RHS)  
40  
8
7
6
5
4
3
2
1
0
20  
0
-20  
-
40  
-
60  
07  
08 09 10 11 12 13 14 15 16 17 18 19 20  
Source: CSD, Hong Kong Tourism Board  
2
020 (down from 5.8 million visitors a month in H1 2019). Activity in  
Investment collapsed in 2019 (-12% vs. +2% in 2018), pulled down  
by the erosion of business sentiment and economic growth  
prospects. The situation is likely to have deteriorated further in  
Q1 2020 due to the decline in economic activity and corporate  
losses. Private investment should remain depressed in the quarters  
ahead.  
the tourism sector is expected to remain at a standstill for several  
more weeks or even months. The impact on the economy will be  
significant: spending by tourists (78% of which were from China) in  
local retail shops accounts for about a third of Hong Kong’s retail  
sales, and tourism accounts for an estimated 4.5% of GDP.  
The downturn in the labour market was moderate in 2019, but is  
expected to worsen in H1 2020, restraining the rebound in private  
consumption. Employment and real wages dipped slightly in  
H2 2019. The unemployment rate rose from 2.8% in mid-2019 to  
The contraction in tourism, global trade and China’s external trade  
led to a decline in Hong Kong’s exports and imports of goods and  
services in 2019. These trends will continue in 2020. Merchandise  
exports (99% of which are re-exports) were down 4% in 2019, and  
declined another 12% y/y in the first two months of 2020. In net  
terms, however, external demand made a positive contribution to  
real GDP growth (of 2.3 percentage points) in 2019, after making  
negative contributions in the three previous years.  
3
.3% at year-end 2019, before hitting 3.7% in February 2020. Last  
but not least, the equity market correction (the Hang Seng index  
plunged 16% in Q1 2020) and the decline in real estate prices (-6%  
since mid-2019) should fuel negative wealth effects that will weigh  
on household consumption in the short term.  
EcoEmerging// 2nd quarter 2020  
18  
economic-research.bnpparibas.com  
Fiscal policy is increasingly expansionist  
3- Fiscal balance will now remain in deficit  
The government adopted a clearly expansionist fiscal policy in 2019  
to address the contraction in private demand and the deterioration in  
business sentiment and household confidence. The 2019/20 budget  
included tax cuts, increased social welfare spending, and new  
investments in infrastructure, innovation and the development of  
technological hubs. Faced with the shock engendered by the  
coronavirus epidemic, the government announced two new, large  
stimulus packages in February and then in early April. The plans  
mainly call for one-off measures to curb the decline in domestic  
demand in the short term. In the future, the government will also  
need to round out its fiscal policy with more structural measures that  
aim to improve the social welfare system and improve access to  
housing, which would bolster private consumption and strengthen  
medium-term growth prospects.  
% of GDP  
% of GDP  
28  
12  
2
4
0
6
8
2
1
4
0
12  
8
-4  
Government balance (LHS)  
Government revenue (RHS)  
Government expenditure (RHS)  
-
8
4
-
12  
0
2007  
2009  
2011  
2013  
2015  
2017  
2019  
2021 p  
Source: Hong Kong Treasury, BNP Paribas  
The fiscal stimulus plan for 2019/20 accounted for 1.3% of GDP.  
The new stimulus packages introduced since February account for  
and the property market downturn. Government expenditure  
increased by 15%, with an acceleration in Q1 2020 due to the first  
measures of the new stimulus package. In fiscal year 2020/21,  
revenue should decline significantly, while spending will continue to  
rise and reach a record level close to 28% of GDP, vs an average of  
19% of GDP over the past five years (chart 3). The government has  
substantial manoeuvring room to absorb some slippage in its  
deficits in the short and medium term. Thanks to a solid tradition of  
fiscal discipline, it has reported surpluses over the past 15 years,  
despite the volatility of fiscal revenues (which rely on taxes, stamp  
duties and land premium). As a result, the government has  
managed to build up very comfortable fiscal reserves. In fiscal year  
2019/20, reserves accounted for 39% of GDP and 23 months of  
fiscal spending (compared to 13 months in 2004/05). These  
reserves will be used to finance part of the upcoming deficits, which  
means they will diminish in the years ahead. Fiscal reserves should  
narrow to less than 15 months of fiscal spending by the end of fiscal  
year 2020/21, which still provides a very comfortable safety buffer.  
The central government could also opt for bond issues. It has a  
minimal debt burden, which is more than covered by assets: its  
1
0% of GDP. They aim, first, to strengthen Hong Kong’s capacity to  
combat epidemics with the creation of a new Anti-Epidemic Fund  
HKD 30 bn, or 1% of GDP) and, second, to support corporates and  
(
households in order to offset their revenue loss, boost domestic  
demand and encourage a rapid rebound in activity. The measures  
include: 1) cash payout of HKD 10,000 (nearly USD 1,300) to each  
permanent resident aged 18 or above, for a total of HKD 71 bn  
(
2.5% of GDP); 2) tax and fee reliefs and other one-off relief  
measures (public services, rent for low-income housing…) for a total  
of HKD 81 bn (2.8% of GDP); 3) an employment subsidy scheme  
aimed at helping employers to pay wages for a period of six months  
(
HKD 80 bn, or 2.8% of GDP); 4) relief measures for a list of specific  
sectors hit by the epidemic (tourism, construction…) for a total of  
HKD 21 bn or 0.7% of GDP; and 5) temporary job creation  
(
HKD 6 bn, or 0.2% of GDP).  
Hong Kong’s monetary policy has also been loosened. Given the  
Currency Board arrangement, the Hong Kong Monetary Authority  
follows decisions of the US Fed. As a result, the base rate was cut  
from 2% to 0.86% in March. The authorities have also introduced  
lending programmes for SMEs (with low interest rates and state  
guarantees) and eased the prudential standards of banks to  
encourage them to cover corporate and household financing needs  
in the short term.  
2
004 international bond issue matured in 2019; and the bonds  
issued as part of a local market development programme (which are  
not used to finance the budget) account for less than 5% of GDP.  
In contrast, corporate debt is very high (226% of GDP at end-  
September 2019) as is household debt (79%), which makes them a  
source of vulnerability in the current environment. Some will find it  
increasingly difficult to meet loan payments despite the relief offered  
by the authorities and creditors. Banks’ average performance is  
likely to deteriorate in the months ahead, but the Hong Kong  
financial system as a whole is solid. Banks have sufficiently strong  
equity capital and liquidity to weather the shock.  
Public finances are solid enough to weather the  
shock  
The government is expected to report a deficit of 1.3% of GDP in  
fiscal year 2019/20 (ended 31 March 2020): this would be its first  
deficit since 2003. In fiscal year 2020/21, the deficit could swell to  
1
0% of GDP. The deficit should narrow thereafter as economic  
growth recovers and the government adjusts its fiscal policy. Even  
so, the government expects public finances to continue to report  
deficits over the next five years.  
In fiscal year 2019/20, government revenue contracted by 5% and  
represented less than 20% of GDP (preliminary estimate), as tax  
revenues were hit by the recession, the equity market correction  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
Ce site présente leurs analyses.
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