Months of unrest have played a role in spending increases S&P said will ultimately weaken Hong Kong’s fiscal health. Photo: Sam Tsang
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https://scmp.com/news/hong-kong/hong-kong-economy/article/3052729/sp-expects-gradual-weakening-hong-kong-economy Hong Kong economy
S&P expects ‘gradual weakening’ of Hong Kong economy amid looming deficit, increased spending, though credit rating holds firm
- Credit agency predicts spending will continue to rise as city addresses underlying issues, including increasing societal divisions
- Predicted 1 per cent contraction of economy falls within range estimated by government
A day after Hong Kong announced its 2020/21 budget, credit ratings agency S&P warned the expected deficit could weaken Hong Kong’s fiscal health. Photo: Nora Tam
Credit rating agency S&P Credit Ratings warned on Thursday that Hong Kong’s looming record deficit would weaken its fiscal health, while growing social spending driven by increasingly tough challenges facing the city would only worsen the situation.
The American firm forecast the economy would shrink 1 per cent this year – after contracting 1.2 per cent last year – due to a combination of the US-China trade war, violent social unrest and the deadly coronavirus outbreak. The epidemic alone would shave 1.2 percentage points from the GDP in 2020, they predicted.
The forecast falls within the government’s estimated range of between 0.5 per cent growth and 1.5 per cent decline.
“We expect a gradual structural weakening in Hong Kong’s fiscal position in the absence of revenue measures, given acute social spending needs,” S&P said in a statement.
Despite the hurdles, Hong Kong’s credit rating – AA+ with a stable outlook – remains the same.
The city’s ratings have been a source of concern in the past few months, with rating agency Moody’s Investors Service downgrading it from Aa2 to Aa3 in January, while Fitch Ratings cut it from AA+ to AA last September.
Both said they were concerned about the impact of the political unrest on the city’s future, particularly Moody’s, which said the government lacked any tangible plan to resolve the political and economic issues facing it.
Financial Secretary Paul Chan Mo-po revealed on Wednesday the city would face an all-time high deficit of HK$139 billion for the 2020/2021 financial year due largely to a one-off outlay of HK$120 billion for relief measures. The measures include both a large-scale cash handout for individuals and targeted support for companies across a variety of sectors.
S&P said the city’s large fiscal reserve, which the government estimated to be HK$1.13 trillion on March 30, would help absorb the budgetary expenses.
The credit agency said it expected the government’s spending in housing, education and health care to rise as it addressed the underlying issues of violent protests and a significantly divided society. After kicking off in June last year, opposition to a now-defunct extradition bill morphed into a wider anti-government movement, with protests becoming violent.
S&P also urged the government to find new revenue sources and boost public sector efficiency to avoid continued deficits.
“Without these measures, Hong Kong’s fiscal reserves may be run down more quickly than the government expects, to below 25 per cent of GDP by the end of financial year 2024/2025,” the report read.