Hong Kong unveils record budget deficit to cushion blow from coronavirus, protests

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HONG KONG (Reuters) — Hong Kong unveiled a record budget deficit on Wednesday, as it boosted cash handouts to residents and tax concessions for companies to cushion the shock of often-violent protests and the outbreak of a coronavirus on the recession-hit economy.

Hong Kong Financial Secretary Paul Chan is seen on a screen as he delivers his annual budget at the Legislative Council in Hong Kong, China on Feb. 26, 2020.  REUTERS

Finance Secretary Paul Chan said the Chinese-ruled city recorded its first budget deficit in 15 years in 2019-20, at HK$37.8 billion ($4.85 billion), or about 1.3% of gross domestic product or GDP. He expected deficits for the next five years.

The figure accounted for handouts totaling more than HK$30 billion to mitigate the impact of the protests, which saw activists and police clashing in shopping malls and in the financial district. It also included the HK$30 billion in relief announced in recent weeks to support health authorities, small and medium-sized firms and low-income persons.

The economy has been in recession for at least three quarters and many companies in tourism and retail are struggling to survive as a partial closure of the border reduces visitors to a trickle and keeps residents away from public areas.

“No one could have predicted that social incidents would break out in the middle of the year, which not only hit our economy but also broke our hearts,” Chan told legislators.

“Before we could sort things out, there was an unexpected outbreak of the novel coronavirus disease. Preventing and fighting against the epidemic...are our top priority.”

For the 2020/21 fiscal year, Chan expected a budget deficit of 4.8% of GDP or HK$139.1 billion, a record value in nominal terms. In 2003-04, when Hong Kong faced a recession caused by an outbreak of the Severe Acute Respiratory Syndrome, the budget deficit reached 5.3% of GDP, according to ANZ analysts.

The shortfall, which was larger than most analyst forecasts, accounts for lower revenues, as well as HK$120 billion in further relief measures, largely one-offs, including handouts of HK$10,000 to Hong Kong residents aged over 18, tax breaks for firms and other subsidies.

Hong Kong usually runs balanced budgets or surpluses, since its pegged currency system commits it to fiscal prudence. Its ample fiscal reserves, however, allow it to run annual budget deficits during periods of economic headwinds.

“Although the cash payout scheme involves a huge sum of public money, it is an exceptional measure taken in light of the current unique circumstances and will not, therefore, impose a burden on our long-term fiscal position,” Chan said.

Final GDP data on Wednesday showed the economy contracted 0.3% in October-December from the previous quarter, versus a 0.4% drop in a preliminary estimate and revised 3% contraction in July-September.

On an annual basis, the economy shrank 2.9%, in line with the estimate and compared with a revised 2.8% fall in the third quarter. For all 2019, the economy contracted by 1.2%, its first annual decline since 2009.

The first quarter of 2020, when Hong Kong recorded its first coronavirus patients, is expected to be even worse.

Analysts predict the coronavirus will cut 1 or 2 percentage points off first-quarter growth while the contraction for 2020 may be larger than last year’s, depending on the intensity of the outbreak.