The Hong Kong
Budget FY2020/21 –
Key highlights

A combination of external uncertainties arising from China-US trade disputes and internal social disruptions have brought Hong Kong to a recession as the Hong Kong economy contracted in consecutive quarters since 2Q19. For the full year of 2019, the economy contracted 1.2%, in line with Bloomberg consensus but slightly above the Government’s forecast of -1.3% made in November. We believe the recession is set to deteriorate entering into 2020 due to the COVID-19 outbreak, which stalled considerable economic activities locally and regionally.

In view of the taxing economic and social situations, the Government proposes massive counter-cyclical measures involving some HKD 120 billion, under the banner of "supporting enterprises, safeguarding jobs, stimulating the economy and relieving people's burden". While this will result in a considerable fiscal deficit for FY2020/21, it will unlikely erode the Government’s financial robustness given a fiscal reserve north of HKD 1 trillion. Indeed, now is the right time to draw on the SAR’s vast fiscal resources, in our view.

At -1.2% y-o-y, it is the weakest economic performance since 2009. All components of GDP were impacted by weak global and domestic conditions to varying degrees. Unsurprisingly, the impacts were more severe towards the latter part of 2019. Private consumption expenditure declined 1.1% y-o-y, while investment expenditure fell by 12.3% y-o-y amid subdued business confidence. The external environment was austere amid trade disputes and hefty tariffs, as well as softness in many economies. Overall, Hong Kong's total exports of goods fell by 4.7% y-o-y last year. Intense social tensions since June 2019 led to a 10.4% y-o-y fall in exports of services for the year, primarily due to serious attrition in inbound travel. On the fiscal front, Government revenue is estimated to be HKD 567.3 billion for FY2019/20, a shortfall of HKD 58.8 billion compared to original estimate. Government expenditure is HKD 611.4 billion, in line with the original estimate on the whole. Lower expenditures on public works was offset by the establishment of the HKD 30 billion Anti-epidemic Fund. The Financial Secretary expects fiscal reserves to be HKD 1,133 billion by end-March 2020.

The proposed HKD 120 billion package includes a number of measures that have been put in place before, such as waiving or reducing or subsidizing certain fees, duties and utility charges, reduction to profits and salary tax, additional allowance for social security recipients, public rental waivers and concessionary loan schemes for SMEs. Additionally, a HKD10,000 cash payout is proposed for permanent Hong Kong residents above 18. This alone accounts for about 60% of the relief package.

Looking ahead and taking into account the effect of the relief measures, the Government is forecasting GDP to grow in the range of -1.5% to 0.5% in 2020, and rise to an average of 2.8% in 2021-2024, broadly in line with the trend growth rate of 2.9%.

Perhaps not too surprisingly, land supply for housing and commercial development remains underwhelming. The FY2020/21 Land Sale Programme comprises a total of 15 residential sites, capable of providing about 7,500 residential units. Together with MTR projects and private ones, they are expected to yield some 15,700 units, similar to the previous year. There are also six commercial sites, providing about 9 million sq ft of floor area. Long term, the Government will strive to conduct studies related to Lautau Tomorrow, the Lung Kwu Tan reclamation and the re-planning of Tuen Mun West for land supply. However, it will be unrealistic to expect tangible conclusions in the near term as the timeframe for study remains highly unclear.

Download our full report to view key highlights and our initial comments on the Budget Speech and how these measures may potentially affect the local property market.