ABC Finance

Hong Kong’s economy probably shrank by the most since the second quarter of 2003 as the city’s recession deepened, driving the budget into deficit for the first time in five years as tax revenue fell.

Gross domestic product contracted a seasonally adjusted 2.1 in the fourth quarter from the previous three months, according to the median estimate of 8 economists surveyed by Bloomberg News. The consolidated deficit for the year to March 31 may be HK$4.45 billion ($574 million), the survey showed.

The Hang Seng Index has fallen more than 50 percent from last year’s high as the worst financial crisis since the Great Depression sends exports tumbling and unemployment climbing. Financial Secretary John Tsang may announce more economic stimulus measures in his budget speech tomorrow after already signaling that the deficit will be bigger in the next year.

“The government may tolerate temporary large fiscal deficits to move aggressively to preserve jobs, protect consumer purchasing power and stimulate growth,” said Wang Qian, an economist at JPMorgan Chase & Co. in Hong Kong. “Hong Kong has abundant fiscal reserves.”

The government may increase spending on infrastructure, distribute shopping vouchers and waive public-housing rents, Wang said.

The economy shrank 0.5 percent in the third quarter from the second. Another contraction would extend the recession to the longest since 2001.

Shedding Staff

Unemployment jumped 0.5 percentage points to 4.6 percent in the three months through January, the largest increase in a decade.

PCCW Ltd., Hong Kong’s largest phone company, said last week that it fired about 80 workers. HSBC Holdings Plc, Europe’s largest bank by market value, announced in November that it was cutting about 450 jobs in Hong Kong. Standard Chartered Plc, a U.K. bank, said in December that it was trimming 200.

Weakness in the property market will make it harder for the government to revive growth. The number of residential units sold last month tumbled 67 percent from a year earlier, and a stock exchange sub-index of property companies has fallen by almost half in the past year.

“This recession can potentially get a lot worse if the housing market collapses,” said Kelvin Lau, an economist at Standard Chartered in Hong Kong cheapest personal loan rates. “That’s why the government needs to do something now — they can cut the stamp duty for transactions, waive property rates, or take some other measures to help mortgage owners.”

55,000 Jobs

Since December, Hong Kong has provided loan guarantees to businesses, quickened infrastructure spending and boosted temporary work. The government says it will create 55,000 jobs in construction in 2009-10.

Tsang has forecast a HK$7.5 billion budget deficit for this fiscal year and predicted a bigger shortfall in the next one as the government keeps spending and revenue falls.

The budget may include deficits “for at least the next two years,” said Steven Hess, a senior credit officer at Moody’s Investors Service in New York.

Hong Kong’s long-term foreign-currency debt rating of Aa2, Moody’s third-highest ranking, isn’t under threat, because the government has large fiscal reserves and limited debt, Hess said.

The reserves stood at HK$523.8 billion as of Dec. 31 after a record HK$123.7 billion budget surplus in 2007-08.

“There are no immediate rating implications of a period of deficits,” Hess said. “Only if this were to last for a considerably longer time than we now expect would it potentially have an effect on the rating.”

Salary, Profit Taxes

The government will probably waive 75 percent of salary, profit and property taxes for the year through March 31, up to caps of HK$20,000, Deloitte Touche Tohmatsu said this month. Hong Kong may also extend waivers of property rates for another year and subsidize companies hiring new workers, Deloitte said.

The economy shrank 2 percent in the fourth quarter from a year earlier, after growing 1.7 percent in the previous three months, according to the Bloomberg survey. For all of 2008, growth was 3 percent, the survey suggested.

Hong Kong slipped in the third quarter of last year into its first recession since the severe acute respiratory syndrome epidemic of 2003.

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Filed under: business by Specialist