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Hong Kong Politics April 2020

Hong Kong: Second additional round of fiscal stimulus approved in April; fiscal deficit now expected to reach a historic high

The coronavirus pandemic and subsequent containment measures have hammered an already-battered economy, prompting the government to approve another round of fiscal stimulus, amounting to HKD 137.5 billion (USD 17.7 billion)—approximately 4.8% of GDP. This adds to the HKD 30 billion Anti-Epidemic Fund approved on 21 February and the HKD 120 billion relief package included in this year’s budget. In total, the government has now approved a fiscal response to the pandemic worth HKD 287.5 billion (USD 37.1 billion)—approximately 10% of GDP.

The latest round of fiscal stimulus, which was unveiled by Hong Kong’s chief executive on 8 April, seeks to limit job losses; relieve the financial burden for businesses and households; and facilitate a strong recovery once the pandemic subsides. The plan will deploy HKD 120.5 billion to the Anti-Epidemic Fund, HKD 11.7 billion to the Loan Guarantee Scheme and HKD 3.5 billion to the Comprehensive Social Security Assistance Scheme.

The majority of the additional stimulus put into the Anti-Epidemic Fund will be directed towards wage subsidies for eligible employers to retain workers. The government will subsidize 50% of wages, which is capped at HKD 18,000 per month for a six-month period and is projected to cost up to HKD 80 billion (USD 10.3 billion). In total, the government’s is backing HKD 183 billion (USD 23.6 billion) worth of liquidity with its Loan Guarantee Scheme. A number of direct support and payment deferrals also make up a chunk of the new stimulus spending and should temporarily relieve the economic burden facing households and businesses.

Overall, the government expects the additional measures to increase the fiscal deficit for 2020-2021 from HKD 139.1 billion to HKD 276.6 billion (approximately 4.8% of GDP to 9.5% of GDP). This would represent the largest deficit on record, dwarfing the 4.6% fiscal deficit in 2002—which corresponds to the increased spending during the SARS outbreak.

Following the approval of the new fiscal stimulus on 18 April, Fitch Ratings downgraded Hong Kong’s Long-Term Default Rating to AA- from AA, and changed the outlook from “negative” to “stable”.

Explaining why it lowered Hong Kong’s default rating, Fitch Ratings noted:

“After prolonged social unrest in 2019, Hong Kong’s economy is facing a second major shock from the emergence of the COVID-19 pandemic in January. Government and society-wide social distancing efforts to contain the virus’s spread have led to a contraction in economic activity and rise in unemployment, prompting policymakers to announce the most expansionary budget in the territory’s history. These challenges have compounded negative rating trends already in place from the reputational damage that anti-government protests were inflicting on international perceptions of Hong Kong’s business environment and political stability.”

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