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Relaxed quarantine rules unlikely to lift Hong Kong economy
Fitch sees negative growth for third year in a row, warns of economic scarring
The Asset 10 Aug 2022

Hong Kong’s move to relax mandatory quarantine requirements will reduce the burden on inbound travellers but do little to offset the city’s near-term growth and fiscal pressures, according to Fitch Ratings.

In a commentary, the rating agency says it expects the economy to shrink again this year, the third contraction since 2019, heightening the risks of enduring economic scarring.

The government has announced that from Friday (June 12), people arriving in the special administrative region will have to spend three days in hotel quarantine, down from the current seven. They can go home or elsewhere, but will have to undergo medical surveillance for four more days. During the period, they cannot visit places that check vaccine passes such as bars, gyms and restaurants.

“We anticipate the latest partial relaxation of inbound quarantine requirements, to three nights in a designated hotel followed by seven days of periodic testing, will do little to stimulate the return of tourists and short-term business travellers, who have grown accustomed to the absence of any such restrictions across most jurisdictions,” the rating agency says.

“The local retail sector may get a modest uplift in sales over the coming months following the government’s disbursement of a new round of consumption vouchers to Hong Kong residents. However, the effects will likely be temporary, as was the case during the first phase of the consumption voucher scheme in 2021.”

Eligible residents are entitled to receive a total of HK$10,000 (US$1,273) in instalments under this year’s consumption voucher scheme aimed at stimulating the local economy.

Growth forecast

Fitch is revising its annual growth forecast for Hong Kong to -0.5% in 2022, down from a previous forecast of 1.0% published in early April. It maintains its 2023 growth forecast at 3.5% as there is no definitive end in sight to the Covid-zero policies pursued in mainland China, Hong Kong or Macau.

Subdued growth prospects in mainland China and higher local interest rates will also create headwinds to Hong Kong’s economic outlook over the next 12 months, the rating agency says. “Our forecasts imply 2023 real GDP will be less than 1% above the level seen in 2018. This would put Hong Kong’s economic performance among the bottom 15% of all Fitch-rated sovereigns and territories over the period.”

Fitch says economic activity has marginally improved in recent months as the authorities have relaxed restrictions on businesses and mobility imposed in early 2022 to control a fresh outbreak of Covid-19. However, recovery remains hampered by enduring social controls, which it says are unlikely to be rescinded fully until similar policies are relaxed in the mainland. This may not occur until 2023 or beyond.

Advanced estimates suggest Hong Kong's economy contracted by 1.4% year-on-year in the second quarter of 2022, following a 3.9% y-o-y contraction in 1Q22. Government spending constituted the main source of support during the second quarter, as private consumption, investment and external trade remained weak.

Fiscal deficit

According to the commentary, Hong Kong’s budget is expected to fall back into deficit during the fiscal year that began in April 2022, after having returned to balance in fiscal year 2021. Government figures for 1QFY22 showed revenue at its lowest quarterly level in more than five years, due to declines in inflows from taxes, duties and land sales.

Meanwhile, expenditure remains high amid pandemic-related containment measures and support schemes. Fitch believes the deficit will rise to about 6% of GDP in FY22, nearly double the estimate of 3.1% in the government’s budget speech in February.

The rating agency last affirmed Hong Kong’s rating at “AA-” with a stable outlook in April. It says most factors underpinning the rating remain unchanged. These include the territory’s large fiscal reserve, worth about 30% of GDP, and its robust external finances, which are supported by recurring current-account surpluses.

“However, the government’s apparent prioritization of broader national strategies and governance practices over economic competitiveness suggests a future policy trajectory that will increase risks to Hong Kong’s role as a leading centre for international finance and commerce, in our view. If these risks crystallize, it would leave the economy less dynamic, accelerate fiscal policy challenges associated with ageing and potentially contribute to downward pressure on the territory’s credit rating,” it says.

Satoru Yamadera
Satoru Yamadera
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