Hong Kong braces for weaker growth as "political volatility" strains economy

[HONG KONG] Political tensions in Hong Kong are hurting the economy said the city's financial secretary in his annual budget speech on Wednesday, as he rolled out a multi-billion dollar package of sweeteners to bolster growth hit by a slowdown in China.

In unusually blunt comments for a budget address, John Tsang said "political volatility" was threatening to undermine the economy and warned disputes would intensify ahead of legislative elections this year pitting the city's democratic opposition against pro-Beijing and pro-establishment political parties. He said the conflicts must be resolved.

"Politics and economics are closely intertwined. Political volatility will unavoidably impact our economy," Mr Tsang said.

In the wake of a night-long 'riot' earlier this month that saw protesters fight pitched street battles with police, Tsang warned Hong Kong faced "even greater chaos" and risks future generations growing up "in the midst of hatred".

Hong Kong is a special administrative region of China that returned from British to Chinese rule in 1997 under a "one country, two systems" framework that guarantees broad freedoms and autonomy.

Mr Tsang, who said the local economic outlook was "far from promising", expects GDP growth to slow to 1-2 per cent in 2016. Economic growth for 2015 came in at 2.4 per cent, in line with the government's estimate, and compared with a median 2.3 per cent forecast by six economists surveyed by Reuters.

DEFICITS AHEAD

After a stint of healthy surpluses, including HK$30 billion (S$5.43 billion) for the current financial year, Mr Tsang said he expected the city to run up deficits in its consolidated accounts for two years starting from 2018.

Among measures to boost growth were a personal tax cut up to HK$20,000 for some city residents, some property rate waivers and a public housing supply target of 280,000 units for 10 years up to 2026.

Hong Kong home prices remain among the highest in the world.

The recent riot, slowness in rolling out major infrastructure projects such as a rail link with China and HSBC Holdings' recent shunning of the city for its headquarters, are also weighing on Hong Kong and have tarnished its reputation as a law-abiding and efficient global business hub.

The Hong Kong government faces a big test and analysts are looking for signs of long-term economic policies and strategic vision, instead of short-term economic sweeteners.

The retail and tourism sectors, important drivers of the local economy, have also been hit hard by a drop in mainland Chinese tourists.

REUTERS