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Friday, December 11, 2015, 09:25

The SAR is facing some difficult economic challenges

By Peter Liang

Nearly all economic indicators seem to suggest that Hong Kong is caught between a rock and a hard place.

Let us start with the rock.

Exports, which are a main engine of economic growth, have been on the skids for months. In the third quarter of 2015, the export index compiled by the government-sponsored Trade Development Council plunged to its lowest level in three years to 37.1, down from 46.8 a year earlier.

The outlook regarding exports is anything but bright. Re-exports of goods to and from the mainland, which make up more than 80 percent of Hong Kong’s total exports, are widely expected to trend down further as the mainland economic slowdown continues.

Tourism has never been a major contributor to Hong Kong’s GDP. But the decline in tourist arrivals — especially those from the mainland who accounted for the bulk of overseas visitors — has been blamed for the plight of the retail sector, one of the biggest employers, in past months.

Latest official figures show that retail sales in the first 10 months of 2015 fell 2.7 percent from a year earlier period. Sales of luxury goods, jewelry, watches, clocks and other items targeting mainly tourists took the biggest hit. In contrast, sales at supermarkets and other outlets catering to local consumers increased, indicating that consumer spending has remained robust.

But this could change in coming months as consumer confidence is widely seen to be eroded by depreciating values of various classes of assets, including stocks and properties.

The Hong Kong stock market has slipped into the doldrums since the beginning of 2015. Even the bluest of blue chip stocks in the banking and property sectors has lost much of their collective status as the bulwark of stability.

For years, many prospective home buyers had been wishing for a fall in property prices to levels they could afford. Now, they may be getting what they wished for. But the chill winds said to be sweeping through the property market can have a far-reaching impact not only on the banking sector, but on consumer confidence also. This is because a large portion of household wealth in Hong Kong is tied to properties.

Economic down-cycles are not new to Hong Kong. But the problem this time is compounded by the impending interest rate increase in the US and a further strengthening of the US dollar.

This is where the hard place lies. Hong Kong may be able to postpone a rate hike for some months. But its currency will have to appreciate in tandem with the US dollar because of the linked exchange rate arrangement. This could result in a further erosion of Hong Kong’s competitiveness against neighboring economies that have allowed their currencies to depreciate.

Denied of any effective monetary tool, the Hong Kong government would have to rely on fiscal measures to stimulate economic growth and boost employment in times of a recession. It is comforting to know that the government has sufficient financial resources and expertise at its disposal to boost economic growth by increasing capital expenditure on housing and infrastructure projects.

A highly disciplined budgetary policy has ensured that the government is not only debt free but also sitting on a huge pile of fiscal reserves far in excess of the prudent provision for any imaginable contingency.

In fact, the government has laid out an ambitious plan for housing and infrastructure developments in coming years. Construction work on some of these projects has already commenced, while the planning for others is moving ahead according to the government’s self-imposed tight schedule.

There were numerous cases in the past when public projects were held up by the filibustering tactics of some radical opposition members of the Legislative Council (LegCo) for political reasons. Hundreds of millions of dollars in public funds were wasted as a result of such wanton acts of political grandstanding.

Such irresponsible acts of no more than a handful of LegCo members should not be tolerated, especially at a time when fiscal expenditure is needed to minimize the impact of a looming recession on economic growth and the job security of millions of workers. Hong Kong people should seriously consider exercising their rights at the ballot box to vote these self-serving obstructionists out of public office in next year’s LegCo election.

The author is a veteran current affairs commentator.

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