Hong Kong - The Bills Are Coming In

The mass protests and political standoff are bringing Hong Kong to a halt economically. This isn't exactly news: we already knew retail sales fell 6.7% yoy in June, 11.5% in July and 23% yoy in August, with deflections below seasonal trends or 1SD, 1SD and 2.4SDs respectively. We get the numbers for September tomorrow, and anything better than a 20% fall will be good news.

Today, however, we got a broader taste of what the bad news looks like. First, we got the GDP flash estimate for 3Q, which showed a fall of 2.9% yoy, with the quarterly movement no less than a staggering 4.9SDs below trend. But the details look even worse: fixed capital investment fell 16.3% yoy, and, potentially even more devastating, export of services dropped 13.7% yoy.

Export of services is what Hong Kong does: it is now, as it has always been, its raison d'etre. Export of services is what allows it to have among the world's most overpriced property.

Hard on the heels of the GDP numbers, we got news of the collapse in Hong Kong's budget position. In September, Hong Kong reported a budget deficit of HK$53.4bn. The government spokesman tried to pass this off as a typical seasonal deficit, but it isn't. Over the last three years, September's government finances have shown, on average, oa HK$8.7bn deficit. In September 2018 the deficit was HK$9.8bn. In fact, what's happening is that revenues are collapsing (down 54% yoy and 1.5SDs below trend), whilst spending is ballooning (up 67.8% yoy and 3.1SDs above trend).

Can the government do anything about it? If not, on current trends - and I'm being generous here by assuming that historic trends can be restored within 4Q - Hong Kong will be looking at a budget deficit of HK$113bn in calendar 2019, compared with a surplus of HK$150.8bn achieved in calendar 2018. That would be a deficit equivalent to around 4% of GDP.