Hong Kong dollar bills are displayed for a photograph in Hong Kong, China. (Photographer: Jerome Favre/Bloomberg News)

Hong Kong's Budget Surplus Shrinks as the List of Headwinds Grows

(Bloomberg) -- Hong Kong’s Financial Secretary Paul Chan will have a much smaller pile of cash to distribute than last year when he presents the annual budget Wednesday, and a longer list of problems to address.

The economy has slowed as the trading hub found itself wedged between the U.S.-China standoff and the property market has come off its record highs. Both of those factors have shrunk the fiscal surplus available to Chan to a figure likely below HK$60 billion ($7.6 billion), down from HK$149 billion last year.

Hong Kong's Budget Surplus Shrinks as the List of Headwinds Grows

Economic growth, which spiked to a seven-year high of 4.6 percent from a year earlier in the first quarter, has since slipped to 2.9 percent in the third. The world’s most expensive property values have trailed off as borrowing costs rose in the wake of the Federal Reserve’s hikes. A promising rally in retail spending through the first half of the year has almost entirely evaporated.

Even the stock market failed to cooperate last year, as the benchmark Hang Seng Index stumbled to its worst annual loss since 2011.

Hong Kong's Budget Surplus Shrinks as the List of Headwinds Grows

Chan will present his budget on Feb. 27. Fourth-quarter gross domestic product is also scheduled to be announced the same day, with a median estimate of 2.3 percent growth according to a Bloomberg survey of economists.

Chan warned in a Feb. 17 blog post that fourth-quarter GDP growth will slow even further, to less than 1.5 percent -- the worst performance since the first quarter of 2016.

That will also drag the 2018 expansion to the low end of the 3 to 4 percent growth forecast by the government. Chan disclosed the city’s budget surplus for the first nine months stood at HK$59 billion at the end of December. The final figure will be released on Wednesday.

“The situation is not optimistic,” Chan said in the post, highlighting the government’s first-quarter business tendency survey that shows 21 percent of responding companies expect their business situation to be worse in the first quarter of 2019, compared with only 9 percent expecting it to be better.

Jeremy Choi, Hong Kong tax partner with accounting firm PwC, said his firm now projects a full-year surplus of HK$50 billion to HK$60 billion, or roughly a third of the surplus from a year ago, blamed to a large degree on lower revenue from property transactions and stamp duties.

Choi noted that the financial secretary has previously indicated that there will not be handouts in the same fashion as last year.

In 2018 the government cut taxes and increased investment in high-tech industries as well as a scheme to distribute additional handouts of as much as HK$4,000 to eligible citizens. This year, items trailed in advance of the budget include Chan’s plan to spend HK$5 billion on a face-lift for the city’s harbor area, and another HK$500 million to upgrade Hong Kong’s public toilets, the South China Morning Post reported.

With less to go around, Choi suggests the government focus on investments in long-term growth, such as a more comprehensive tax incentive framework to attract high-tech companies from overseas and the mainland, in a highly competitive environment.

Hong Kong does still have the security blanket of a significant fiscal reserve in place, projected to come in at about HK$1.15 trillion as of March 31, Choi said. That’s roughly in line with the government’s projection of HK$1.14 trillion, according to a December budget consultation document.

“We still have a decent reserve after this year, but we have to use our reserve wisely and appropriately,” Choi said. “The surplus may decrease further in the next few years if you continue to face a challenging economy.”

©2019 Bloomberg L.P.