Alicia García Herrero (Natixis) | Hong Kong has experienced three years of recession within the last four. The ripple effect is painful with a persistent fiscal deficit. The recent budget does not change the trend as the fiscal account (excluding bond issuance) will remain in deficit at 3.9% of GDP in FY 23/24, despite an improvement from -7.3% of GDP in FY 22/23. Hong Kong’s fiscal reserves also depleted from 16 months of government expenditure to 12 months for the same period. As a result, the government has turned conservative in spending even though it has still offered some visible but minor support to the economy, residents and corporates.
First and foremost, the government has correctly extended its counter-cyclical measures, especially with another round of consumption voucher at $5000 per person, which is equivalent to 1% of GDP. Even though the jobless rate is heading toward 3%, the pre-pandemic level, the working population has fallen by 4.5% since 2019. The 3% we see right now differs from the 3% we saw in the past. Unlike the falling global inflation, Hong Kong will also see higher living costs in utilities, transport and housing, especially for mortgage payers, which justifies the extension of subsidies and tax allowances.
From a sectoral perspective, the budget emphasizes boosting finance, infrastructure and technology. There is strong support for green finance, the relaxation of listing rules for technology firms and crypto trading for retail investors, together with the mandate to chase Singapore on aviation financing. Regarding infrastructure and technology, the government aims to expand its transport and digital connectivity reach. However, the fiscal deficit means the government will issue more bonds to fund such expenses or find more public-private partnerships, which might create new finance opportunities in Hong Kong.
The other focus is on housing. The downward pressure on home prices has negatively affected fiscal revenue through lower land sales and stamp duties. Even though the government is trying to foster sales by reducing the stamp duty for first home buyers, the changes are minimal. The reopening with Mainland China may offer some help, but the FED is still the decisive factor. As such, it is still possible to see a 10% drop in home prices if mortgage rates continue to climb, assuming there is no change in macro-prudential policies.
Still, the disappointment comes from the lack of policies on halting talent outflows, beyond the already announced visa program. There is no clear direction to retain existing talents by improving the quality of life through health care, affordable housing and youth development. In particular, the share of aging population in Hong Kong will rise from 20% in 2022 to 35% in 2040. The workforce will shrink by 17% by 2040, which is a reduction of 850k residents. The only new announcement is the Capital Investment Entrant Scheme, which includes non-property assets and can be a source of government bond buyers.
All in all, the budget offers minor perks but not structural solution, which is limited by the deteriorated fiscal balance. The government has had no choice but to reduce the ballooned budget deficit of the last few years, which is a consequence of its COVID-related spending, clearly limiting the scope for big solutions to long-term problems.
Hong Kong’s new budget bets on growth to reduce ballooned fiscal deficit
