HK to post first budget deficit in 15 years amid protests, trade woes

Hong Kong

HONG Kong is set to record its first budget deficit in 15 years, the city's finance chief warned on Monday, as the business hub reels from the twin shocks of the trade war and protracted democracy protests.

In the latest grim assessment for the city, Financial Secretary Paul Chan told lawmakers that the economy was set to contract 1.3 per cent in 2019, hitting the city's usually bulging coffers.

He blamed the 2019-2020 deficit on decreased tax revenues, a slowdown in land sales and recent economic sweeteners he unveiled in a bid to win over the public during a tumultuous year of unrest.

"At the end of the financial year, the SAR government will be in the red," Mr Chan said, using an abbreviation for the Hong Kong government.

"Hong Kong's economy is now in extremely difficult times," he added, as he called for the political violence to cease.

The city has been battered by nearly six months of protests triggered by rising public anger over China's rule and the police's response to protests.

Crowds are pushing for greater democratic freedoms and police accountability but the city's pro-Beijing leadership has refused any major political concessions.

The increasingly violent rallies have hammered the retail and tourism sectors, with Hong Kong's retail sales suffering a record contraction in October.

Retail sales by value contracted 24.3 per cent in the month from a year earlier, the fourth month of double-digit declines. By volume, sales contracted 26.2 per cent, also a record, according to a government release.

The retail data indicates that the annual "Golden Week" holiday in mainland China failed to translate into a tourist bump that could have alleviated the domestic economic pain. Overall, visitors to Hong Kong fell almost 44 per cent in the month.

For retail businesses, that raises the stakes for coming months. Many proprietors will have to make hard choices - whether to continue the fight into next year or give up as leases come up for renewal and employee bonuses must be paid.

Iris Pang, an economist with ING Bank NV in Hong Kong, sees a 70 per cent chance of a wave of store closures among retailers if spending continues to be weak. The situation is especially dire for catering companies, which typically enjoy brisk business at the holidays though face the prospect of cancellations during periods of unrest.

"Make or break is the correct description for most catering businesses in Hong Kong as some of them have continued in the business just because their rental agreement is not yet due," Ms Pang said. "It is very likely that many catering businesses will close their business if their revenue doesn't make a comeback during this holiday."

Hong Kong's large retailers face a similar predicament. Cosmetics retailer Sa Sa International Holdings Ltd may close about 30 stores in the coming year depending on how the market shakes out and "the results of discussions with the owners on rent reduction", the company said in an emailed statement. Sa Sa shares have tumbled more than 40 per cent this year.

Chow Tai Fook Jewellery Group Ltd will look to cut costs by seeking bigger rent discounts, reducing advertising and reviewing store networks in Hong Kong and Macau, the company said in a webcast after reporting that first-half net income sank 21 per cent. The company has leases at more than 40 stores in Hong Kong and Macau expiring in the next fiscal year.

Hong Kong has been one of the world's largest centres for sales of luxury watches, but it has taken a hammering this year. Swiss watch exports to mainland China surpassed those to Hong Kong for the first time in October.

"If the situation persists, by the end of the year, many watch companies will have to shut down," said Alain Lam, finance director with Oriental Watch Holdings Ltd. "At the end of the year, suppliers will ask for payment and employees will demand a one-month bonus - this may cut off the cash flow for some companies."

Oriental Watch Holdings has managed to negotiate 8-10 per cent discounts in rent from some landlords and will attempt to arrange better deals as leases come up, Mr Lam said. But there's no guarantee the company will retain its significant presence in Hong Kong, as it has healthier operations elsewhere.

"If the numbers don't work out, we will close stores," he said. "We are shifting our strategic focus to mainland China, aggressively." AFP, BLOOMBERG