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Economic challenges under the virus outbreak

With the outbreak of the novel coronavirus, different regions have been increasing vigilance and escalating efforts to fight against the disease. Various anti-epidemic measures have also been implemented in Hong Kong, including a 14-day mandatory quarantine on all the people entering Hong Kong from the Mainland starting from yesterday, covering Hong Kong residents, Mainland residents and other travelers. Civil servants will continue to work from home until next Sunday (February 16), and all meetings of government statutory and advisory bodies will be suspended for the current period of time. These arrangements share the same objective: to reduce cross-boundary people flow and flow of people in Hong Kong, with an aim to reducing the risk of disease spreading. To contain the disease and protect the healthiness and safety of the people is the top priority of the HKSAR Government.

At the same time, the outbreak has dealt a further blow to the already declining economy. Many group gatherings and spring receptions usually held during the Chinese New Year period were cancelled due to the outbreak. Tourist arrivals took a sharp plunge, and the catering, retail, consumption and tourism-related industries have been hit hard. Both enterprises and their employees are facing pressure on income cut or financing. Some companies have been offering unpaid leave, cutting salary and even laying off staff. In fact, with more citizens staying at home, business and economic activities as a whole have slowed down significantly. Economic situation has becoming more and more difficult, and we have to deal with it without delay.

To maintain people’s confidence during economic downturn, it is crucial to address the financing problems of enterprises and employees. To this end, I have earlier appealed for positive response from the banking industry through the Hong Kong Monetary Authority. We are pleased that some banks have already taken the initiative to introduce relevant measures, including time-limited principal moratorium for mortgage loans for clients engaged in retail, catering, logistics, and tourism industries etc. I believe other banks will launch similar measures to support our SMEs very soon. In addition, I reiterate my appeal to property owners to tide over difficult times together and fulfil their social responsibilities by providing more substantial rent reduction for tenants whose business is in distress.

Indeed, Hong Kong’s economic environment had been severe before the virus outbreak. According to the forecast estimate released by the Census and Statistics Department last week, GDP grew at a negative annual rate of 2.9% in the fourth quarter of last year, the second consecutive quarter of contraction. In which, exports of services (covering the tourism industry in Hong Kong) and total local capital investment (reflecting the business climate) fell sharply by 25% and 16.2% respectively. For the whole of 2019, GDP is expected to contract by 1.2% in real terms, the first annual decline since 2009.

Retail and catering are two of the most "hard hit" industries. The volume of retail sales fell by 24% in the fourth quarter of last year, which is the largest quarterly decline on record. For the catering sector, total restaurant receipts fell by 14% in the last quarter, and by about 6% for the whole of last year, showing the first annual decline since 2003.

It can be expected that our job market will be facing increasing pressure. The latest unemployment figures to be released in mid-February will very likely to rise from 3.3% in the fourth quarter of last year.

The extent of the disease’s impact on our economy would depend on how the outbreak evolves, but it is quite certain that the outlook would not be optimistic and the impact may be higher than that of SARS (Severe Acute Respiratory Syndrome) in 2003. Internally, Mainland visitors now account for 78% of the total visitor arrivals in Hong Kong, much higher than the rate of 41% in 2002. Tourism accounted for 32% of Hong Kong's total service output in recent years, up from 21% during the SARS period. It follows that continued weakness in the tourism and retail sectors will bring a more significant blow to our economy. Moreover, compared with SARS, the rapid spread of the current disease over the whole country will have a huger impact on Mainland’s transforming economy. If China's economic growth loses impetus, the global economy will suffer as well.

As regards the financial market, over the past two weeks, no irregularities have been seen in the bond, currency, foreign exchange and derivatives markets. The equity market has been operating smoothly in an orderly manner despite some volatility. This reflects the continued confidence of local and international investors in the Hong Kong market. We will continue to monitor the market closely.

The new Budget will be released in around two weeks. The evolving outbreak of the virus has posed great challenges to the preparation work. I am assessing the latest impact of the outbreak on our economy, and will consider suitable measures.

February 9, 2020