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Stabilising the economy while fighting against the pandemic

The COVID-19 pandemic has dealt an unprecedented and severe blow to the global and Hong Kong's economy in almost every aspect. The global economy is heading into a deep recession, and how long it would last is uncertain. Many enterprises' businesses have been put to a halt with cash flow drained. Employees' income have been falling due to salary cut, unpaid leave or even layoff. With the pandemic yet to be brought under control overseas, the impact to Hong Kong would not be eased in the short run. We should make extra effort to avoid large-scale unemployment, which could in turn further weaken the gross demand and trigger a downward spiral for the economy and the employment. This is why the Government launched the second round of Anti-epidemic Fund (AEF) last week with a series of measures totalling $137.5 billion, with a view to stabilising the economy and maintaining people's confidence by safeguarding jobs and supporting enterprises to the largest extent.

Safeguarding jobs is one of the major objectives of the latest round of measures. Among which, $80 billion will be spent on the new Employment Support Scheme (ESS), which aims to provide the enterprises with incentive for not to lay off their employees as far as possible under the current difficult situation, benefiting more than one million employees. The AEF will also provide support for another 800 000 employees from the catering, construction, transport and tourism industries, and also 210 000 plus self-employed persons with MPF accounts. In addition, the Government will spend $6 billion to create 30 000 jobs in both the public and private sectors in the coming two years.

Why is it so important for us to safeguard jobs? It is not just a matter of the economy, but more importantly, a matter of people's livelihood. Hong Kong has a labour force of about 3.9 million. Just one percentage point increase in the unemployment rate implies that several ten thousand more employees, who are supporting their own families, are losing their jobs. Safeguarding jobs is therefore a critical part in protecting the livelihood of people.

Supporting enterprises is another crucial element in the latest round of measures. In the course of fighting against the pandemic, our two major economic drives, local consumption and trade, have been brought to a halt. Many enterprises are facing a severe blow to their businesses as well as great pressure on cash flow. In view of this, we have made substantial adjustments to our SME Financing Guarantee Scheme (SFGS). The maximum facility amount of the 80% guarantee product will be increased from $15 million to $18 million. For the 90% guarantee product, its maximum facility amount will be increased from $6 million to $8 million, and the application eligibility will be relaxed so that more enterprises affected by the pandemic, including listed companies, could apply. For the 100% guarantee product, the maximum facility amount will be increased from $2 million to $4 million, and the total guarantee amount committed by the Government will be raised to $50 billion to benefit more SMEs.

On interest rate, a new concessionary rate subsidy up to 3 per cent for one-year period will be provided under the 80% and 90% guarantee products to relieve the burden of interest rate expenses on the enterprises. In addition, the aforementioned ESS could also alleviate some of the operating cost of the enterprises, so that they can have more confidence in going through this testing time.

Why is it so important to support enterprises? As enterprises provide jobs and constitute a part of the supply chain, supporting enterprises could ensure the smooth functioning of our economic activities and provision of services for the people. Our support to enterprises needs to be broad enough so that it could help avoiding the occurrence of widespread credit risks and hence securing financial stability. This is the reason why we give higher priority to cross-sectoral and cross-services measures when considering the different options of relief measures. Moreover, since Government resource are finite, we should try our best to leverage the power and resources of the market to maximise the effectiveness of our measures. For instance, the SFGS allows us to leverage the capitals of the banking system to meet the financing needs of enterprises of different sectors. Although the Government still has to bare the risk of loan guarantee, it is still a relatively smaller amount of money when comparing with the loan amount.

In addition, we have made efforts to ensure sufficient money supply in the market through measures by the Hong Kong Monetary Authority (HKMA). HKMA has lowered the Countercyclical Capital Buffer (CCyB) ratio and the level of regulatory reserves within one month, further releasing around $700 to $800 billion of lending capacity in total. Moreover, HKMA plans to reduce the issuance size of Exchange Fund Bills this month in order to increase the overall Hong Kong dollar liquidity of an amount of $20 million in the interbank market. HKMA has also arranged repo transactions with the U.S. Federal Reserve to provide additional liquidity of US dollars for the local market, thus reducing the cost of capitals.

The scale of the second round of AEF amounts to $137.5 billion, which could provide a two per cent buffering effect to the GDP. Together with the first round AEF measures, as well as the relief measures of $120 billion proposed in the Budget, the total expenses amount to some $290 billion, equivalent to 10% of the GDP, the extent of which is very close to other major economies. The weak economic outlook this year is also expected to have an adverse effect on the tax and land sale revenue. Taking all these factors into account, the deficit of this fiscal year will very likely surge to over $280 billion.

Why is this scale of expenses affordable for the Government? It is because all these special measures are only one-off in nature under the current unique situation, despite the fact that they will reduce our fiscal reserve from about $1,100 billion to around $800-$900 billion, equivalent to 14 to 15 months of government expenditure. Indeed, now is the time for the fiscal reserve, which we have built up gradually in the past, to serve its function. The reserve allows us to roll out large-scale countercyclical measures during this difficult period, relieving the pressure on employment and livelihood.

Our top economic priority now is to safeguard jobs and support the enterprises through capitalising the power of our fiscal reserve and suitably leveraging market resources. Nonetheless, the most crucial task is still our anti-pandemic efforts and their effectiveness. A favourable environment for speedy social and economic recovery can only be created if we are able to sustain our efforts in fighting against the pandemic.

The development of the pandemic across the globe in the past three months has raised concerns on whether effective control over the pandemic and effective support to the economy can be achieved at the same time. Before the discovery of vaccine or other measures that can quickly contain the spread, would the anti-virus measures become new norms to us? If so, it would become a common challenge for the whole world to strike a balance between protecting people's health and supporting the economy and people's livelihood.

April 12, 2020