Following the special administrative region government’s launch of the second round of the Anti-epidemic Fund measures, the government’s budget deficit for fiscal year 2020-21 is expected to reach HK$276.6 billion (US$35.7 billion), accounting for 9.5 percent of Hong Kong’s GDP for the same period.
The estimated 9.5 percent budget deficit figure was calculated based on the expected -1.5 percent to 0.5 percent GDP growth for 2020, as estimated in the 2020-21 budget. However, since the financial secretary announced the budget on Feb 26, COVID-19 has become a global pandemic, and in fewer than two months, the world economy has plunged into recession. The economic downturn in Hong Kong is bound to be much more serious than what the financial secretary anticipated in his budget.
Worse, experts around the world generally believe that the pandemic will last 18 months or longer. Consequently, it’s likely that Hong Kong will introduce the third or even fourth round of the Anti-epidemic Fund. As a result, the city’s total fiscal deficit will continue to rise, and will certainly exceed 10 percent of GDP. How high the number can go is still hard to predict.
The second round of Anti-epidemic Fund primarily consists of a HK$80 billion Employment Support Scheme (ESS). The SAR government will provide wage subsidies equivalent to 50 percent of the wages of employees, capped at HK$18,000 per month, which is the medium wage in the second quarter of 2019. The ESS, which will last six months, is expected to benefit 1.5 million employees, each of whom will be eligible for a subsidy of up to HK$9,000 a month, or up to HK$54,000 over the six-month period. However, this will be, as the SAR government predicts, a contingency fund in the short run. If the pandemic remains unabated, and the recession deteriorates into a Great Depression, then the originally planned six-month wage subsidy may have to be extended. Should that be the case, public funds set aside for the ESS will far exceed HK$80 billion.
Hong Kong, certainly has sufficient fiscal reserves to brave the economic winter. Even if the fiscal deficit turned out to be double that of the estimated HK$276.6 billion, the SAR government would still have HK$500 to HK$600 billion in reserves. Nevertheless, before COVID-19 unfolded into a global pandemic, the financial secretary had already warned that a deficit would not only occur in fiscal year 2019-20, but also over the next five years. With the worsening situation to date, Hong Kong is running the risk of exhausting its fiscal reserves.
Fiscal reserves play an important role in maintaining the linked exchange rate system (LERS) for the Hong Kong dollar. A rapid exhaustion of fiscal reserves would shake the foundation of the LERS. The COVID-19 pandemic has caused mayhem in the global financial markets. As an exceptionally open world financial center, Hong Kong is not immune to the impact of the rapid flow of hot money. Over the course of this year and next, it will have to deal with the unprecedented challenges of a worsening economic recession, depletion of fiscal reserves and impairment of the LERS.
While endeavoring to contain the epidemic, the SAR government ought to rely more on the Chinese mainland to mitigate the economic recession. It’s important for Hong Kong to work in collaboration with Macao and the mainland to build a line of defense against imported infection cases as quickly as possible. Meanwhile, the three sides should accelerate the development of the Guangdong-Hong Kong-Macao Greater Bay Area. It’s worth mentioning that some individuals within the pro-establishment camp initially considered the COVID-19 epidemic a matter for the mainland. They believed that what Hong Kong needed to do was to shut down most cross-boundary facilities so that Hong Kong would be spared the viral strain and, at the same time, they could take the chance to strengthen ties with the United States, the United Kingdom and other Western countries. To their surprise, COVID-19 has rapidly evolved into a global pandemic with Europe and the US having become the epicenters of infections. In the face of such a reality, these individuals should wake up to the fact that Hong Kong and the mainland have a shared future.
Mankind is facing an unprecedented situation in which no one can accurately predict when the pandemic will end, nor can anyone get hold of when and how the world could ride out the economic storm in case the recession turns into a Great Depression. The Great Depression in the 1930s led to World War II, which brought about sea of change in the world order. To date, do we still need a war to end the ongoing centennial shift in the global political order? When major countries around the world are equipped with nuclear weapons, the possibility of a World War III seems inconceivable. Paradoxically, many refer to the global pandemic as World War III. All in all, Hong Kong should, when tackling its economic, political and social issues, take into consideration the context of the shift in the global political landscape. Only then can Hong Kong truly understand the need to integrate itself into the national development strategy.
In recent years, people have been discussing how the LERS should be modified. Such discussions will quickly fade away when the external environment and internal situation are relatively stable. As the LERS is now encountering the greatest challenge since its inception, the SAR government needs to come up with some contingency plans. A while ago, when both HSBC Holdings and Standard Chartered Bank took orders from the UK’s central bank and suspended dividend payments to their shareholders, concerns were raised about Hong Kong’s financial stability in relation to the LERS. These issues associated with the LERS should also be considered when Hong Kong formulates a plan for maintaining the stability of its financial system.
The author is a senior research fellow of China Everbright Holdings.
The views do not necessarily reflect those of China Daily.
