HK economy set to remain under siege from virus; closed borders

ANALYSIS: ECONOMY HK economy set to remain under siege from virus; closed borders

DBS Bank has delivered its economic outlook for the Special Administrative Region, which it says will all ride on its continuing response to the pandemic.

The Hong Kong economy has entered 2021 in a challenging position, according to this report from Samuel Tse of DBS Bank Group Research. He says the much-needed rebound of asset prices and the broader economy will hinge crucially on the development of the Covid-19 pandemic and the eventual relaxation of immigration policies.

Looking specifically at the expectations for unemployment, the retail and tourism sector, and Hong Kong real estate markets, Tse says a further round of timely economic stimulus may be needed to avoid yet another wave of business closures across the Special Administrative Region.

Still, there are some positives to report. Tse says that with the Covid-19 now largely stabilised in China, DBS does expect that border to reopen at some stage early in the new year. This would create a “powerful pull factor” for the Hong Kong economy, he says.

The Singapore bank has revised its prediction for total GDP growth in 2021 up to 4.0%, from 0.5% previously.

Other conclusions drawn by the bank when it comes to Hong Kong immediate economic outlook include: • Domestic demand remains weak; and tourism is moribund. That has pushed the jobless rate across the SAR to higher levels • Another round of economic stimulus is urgently needed.

This will help the Hong Kong economy to avoid yet another next wave of business closures • There are some positive signs however, with the potential for the border with China to reopen during the first quarter of 2021. This would be a powerful pull factor for the economy • The implication to DBS’ forecast, is that 2021 GDP growth has been revised up to 4.0%, from 0.5% earlier during the pandemic.

Soaring unemployment

The unemployment rate rose to 6.4%, in 3Q from June – August, with the number of unemployed persons rising by 11,500. The underemployment rate stayed consistent at 3.8%, the highest level it has been seen at since during the SARS epidemic in 2003 (4.3%). This was due to the stringent

Unemployment is now at its highest levels since the SARS epidemic of 2003.

social distancing rules amid the resurgence of new COVID cases in the quarter, which accounted for over 75% of the total cases in Hong Kong. Economic activities were partly halted, including in-restaurant dining, which was forbidden for most of that time. The worsening employment situation was also partially attributed to the increasing number of first-time unemployed job seekers – students recently graduated from university.

Against this backdrop, more noticeable increases were seen in the consumption and tourismrelated sectors. Hong Kong’s jobless rate rose further to 11.7%, from 10.8%. The unemployment rate could rise again if the border remains closed. Jobless rates of other sectors had already jumped between November 2019 and January 2020. These include the transportation sector, where unemployment rose to 5.9% from 2.2%.

Cathay Pacific announced plans to axe its subsidiary Cathay Dragon, and will implement a large scale lay-off plan, adding to that pain. A total of 5,300 local staff, spanning from cadet pilots to cabin crew, will be impacted. Its number of passengers dropped by 98.1% YoY in 2020, largely comparable to the 99% drop in total Hong Kong visitor arrivals.

As such, the number of unemployed persons will be expected to rise by 1.9%, and translate into another 0.1 percentage point increase in the headline unemployment rate.

For now, Hong Kong has plans to open the border gradually with Singapore under the “Travel Bubble” agreement, that has been delayed since November. Yet, visitors from the Lion City only account for 0.8% of total visitor arrivals, or 1.5% of total tourist spending. Should the situation turn south again, the jobless rate will soar in the months ahead. In fact, tourist spending accounts for around 30% of Hong Kong’s total retail sales value. That said, the consumption sector could at most achieve 70% of their revenue with local spending.

Not too over-optimistic on relief in retail sales

The relative improvement in retail sales, which narrowed from -44.0% YoY in February to -13.1% in August, was largely a result of the low-base comparisons. The retail sales value has recorded negative growth since February, 2019, due to the economic slowdown in China, and the RMB depreciation amid the China-US trade war.

The contraction has further widened since June 2019, when Hong Kong experienced an unprecedented 6-month period of social unrest. Retail sales dropped by 30% YoY in the second half of 2019.

The performance of tourist hot-picks such as jewellery and clothing remained subdued. The hotel occupancy rate rebounded from 29% in February to 50% in August, due to unusual demand from ‘staycations’ – domestic holidaymakers enjoying local stays. Yet, the overall room rate after discounted by CPI dropped to HK$632 per night, even lower than the HK$660 rate during SARS in 2003.

Fiscal constraints kicked-in

Against this backdrop, another round of timely stimulus package is needed to avoid the next wave of business closures.

The budget deficit as a percentage of GDP is expected to reach 11.1% in the 2020-21 financial year, up from 0.4% previously. This was the strongest fiscal stimulus ever. However, another round of rescue packages was restrained by the fiscal reserve, which could maintain government expenditure for another 12 months.

Further stimulus will require the government to issue new bonds. The structural decline of the labour force, resulting from the ageing population, will also increase the need to issue sovereign bonds over the longer term. The Hong Kong Government forecast that the workforce would continue to shrink after the economy recovers from the Covid-19 pandemic in its latest Labour Force Projection (issued in September). These will challenge the mandate of “keeping the expenditure within the limits of revenues in drawing up its budget” stated in the Basic Law

Domestic demand for “staycations” helped push hotel occupancy rates back toward 50%

Hong Kong’s changing unemployment rate

Retail sales by category

Source: DBS Bank Group Research

– the mini-constitution of Hong Kong.

Setting political obstacles aside, enlarging the scale of debt issuance will likely fuel nominal interest rates. Coupled with the deteriorating credit rating of the city, we may see some upward pressure on government bond yields. This was reflected by the hike in the iBond guaranteed yield. This is the first time HKMA guaranteed a yield higher than the concurrent inflation rate. Fortunately, the burden of debt servicing remains manageable as government debt and debt guaranteed by the government has stayed low, and was at 2.4% in August.

The deflation risks will, in turn, increase real interest rates as well, which reached the post-Global Financial crisis high of 3.2% in August. CPI fell by 2.3% YoY and 0.4% in July and August respectively, the first deflation recorded in three years. Hong Kong’s last persistent deflation spanned 68 months over 1998-2004, when it endured four major economic shocks.

Hopefully, the deflation could ease on the back of an ultra-low interest rate environment. Otherwise, a persistently high real borrowing cost will damage the recovering economy.

Diverging property price movements

Residential property prices on the secondary market have fallen 7.7% from their peak before the social movement in June 2019, or 1.3% YTD. The third wave of outbreak has weighed on both transactions and prices. Prices set by developers in the primary market have been less aggressive lately. For instance, the initial average selling price (ASP) of The Pavilia Farm, the latest development co-constructed by New World Development and MTR, was at HK$18,921 per square foot. This is largely comparable to those on secondary market in the same district.

In the rental market, the rising unemployment rate, especially in the low-paying sectors, has already translated into downward pressure on residential rental fees (-7.8% YoY). Likewise, retail shop rents also fell substantially due to weak retail sales performance.

Looking ahead, home prices are expected to show divergent movements. The mass market should stay largely resilient due to the longterm demand-supply imbalance. Short-term supply will remain tight due to the pandemic. The jobless rate of the construction sector, stayed at 10.9% for much of 2020, the highest level last seen during the Global Financial Crisis. This points to the possible delay of construction works in the months ahead. Over the medium-long term, Hong Kong will need extra 9,080 hectares of land due to the increasing ageing population, ageing residential property, as well as increasing demand for larger living spaces.

However, the current land reserve is only 5,000 hectares, including the yet-to-be-approved reclamation project Lantau Tomorrow. Property market indicators such as negative equity (0.1% of total outstanding mortgages), loan-to-value ratio (56.7 in March, 2020 compared to 68.9 in September, 2002), and affordability ratio (41.1 in June, 2020 against 64.4 in June, 1997) point to a relatively low default risk. The long-term demand-supply imbalance, as well as the ultra-low interest rate environment, should continue to serve as a buffer for this asset class.

Yet, we should see more downside risks for the luxury real estate market in the months ahead. The cloudy economic environment may lead business owners to liquidate their assets. Should the border remain closed amid the unstable Covid-19 situation, investment demand from Mainland investors for large units will remain subdued. We expect the overall residential prices to stay flat with some fluctuation in 2021.

To conclude, the rebound of asset prices and economy will hinge crucially on the development of COVID and the relaxation of immigration policies. Economic growth is projected to remain negative due to the third wave of COVID outbreak but narrow to -5.6% YoY in 3Q and -4.1% in 4Q to conclude the year at -7.0%.

With the largely stabilized COVID outbreak in China, we expect the border will re-open in the first quarter of 2021. GDP could thereby rebound by 4.0% next year.

Joblessness in the construction could cause delays of some ongoing projects in the months ahead

Hotel occupancy and room rates

Hong Kong GDP projected to rebound by 4% this 2021

hktdc.com’s new sourcing platform

New sourcing platform connects SMEs to int’l buyers

The upgraded platform

hktdc.com Sourcing is an agile, scalable, extendable, and secure platform supported by AWS cloud technology that is ready to be enhanced and expanded quickly anytime. It was first launched in 2000, helping local SMEs establish business connections with prospective buyers from around the world, with HKTDC’s 50 years of experience in the promotion of foreign trade, and an extensive business network with a total of 50 offices in major commercial cities around the world. Now, by incorporating the latest AI technologies and design, it is said to provide a better and more personalised experience for buyers on their sourcing journey through its simple and clean user experience (UX) design, said the HKTDC. At the operational level, SMEs Safety measures to curb COVID-19 have hampered brick-and-mortar retail businesses in Hong Kong. Social distancing and movement restrictions that governments all over the world have exhibitions, local SMEs and other traditional businesses have turned to online exhibitions and digital Work stoppages and transport disruptions that can create and develop their own personalised shop pages as well as easily upload pictures and information about products to these, said HKTDC, noting that the platform utilises image recognition implemented amidst the COVID-19 were brought sourcing platforms to reach both technology that can suggest pandemic led to the cancellation of upon by the existing and potential customers, keywords of relevant products, so many physical activities inducing pandemic have instead of wholly relying on the SMEs’ offerings can be more exhibitions and business events. disrupted global the usual sales and distribution effectively located by target buyers.

COVID-19 control measures have supply chains channels such as wholesale and “SMEs can also update their hampered brick-and-mortar retail retail. The ongoing pandemic has page content anytime and businesses whilst online shopping changed the sourcing pattern for anywhere, whilst gaining a better grew significantly worldwide in the many companies and accelerated understanding of buyer behaviour first half of 2020, said the HKTDC. the transformation of the global based on data analytics provided by Nearly 4,000 physical exhibitions supply chain, added the HKTDC. the platform which can help them all over the world have been either The council’s survey showed that improve supply chain management postponed or cancelled, according to a significant number of SMEs are and analyse their marketing the HKTDC, affecting deals worth already adjusting their business effectiveness,” added HKTDC. about $2.29t (US$296b). strategies as store operations cope A new Online Purchase feature

Work stoppages and transport with the new normal. just went live on the platform last disruptions that were brought upon The survey showed 69% 5 December 2020, which allows by the pandemic have disrupted increasingly makes the shift flexible pricing and minimum global supply chains, according to to digital to expand online quantity order setting, making the Hong Kong Trade Development distribution channels, whilst 56% it possible for small-quantity or Council (HKTDC). utilises online marketing to develop sample purchases, solving buyers’

“As such, [small and medium- new business markets, and 47% urgent sourcing or sampling needs. sized] enterprises have shifted focus accelerates technology application Order payments can be made from speediness to trustworthiness in their business. easily and securely via PayPal, and when selecting working partners; With this, the HKTDC has cost-effective shipping comparisons the outbreak has accelerated revealed its enhanced digital and settings are facilitated by the the development of regional sourcing platform, hktdc.com feature’s integration with cloud supply chains, whilst localised Sourcing, to better connect shipping software Easyship. manufacturing will become more local small and medium-sized “When it comes to product listing popular,” the council added. enterprises (SMEs) with prospective management, it is just as convenient

Without physical international buyers from all over the world. for SMEs who can manage all

product information via easy-to-use backend operations,” commented the HKTDC.

Meanwhile, in terms of business promotions, SMEs can now flexibly purchase promotion combinations according to their business needs and promotion strategies, increasing exposure on the hktdc. com Sourcing platform and hence increasing opportunities of being seen by prospective buyers and getting business enquiries.

To provide more promotional support to SMEs, the HKTDC has also launched the Newsbites website to share latest buying trends and popular new products regularly with prospective buyers from around the world through popular social media channels.

The platform also allows SMEs to gain intelligence information about the latest purchasing records of buyers worldwide.

“The upgraded hktdc.com Sourcing platform deploys a variety of new technologies and AI is one of them. Powered by the cloud computing infrastructure of Google and Amazon Web Services (AWS), the platform offers new functions, enabled by technologies such as AI and machine learning, that make the matching process as efficient as possible,” added the HKTDC.

The use of AI and machine learning primarily aims to enhance the platform’s matching efficiency between SMEs and their prospective buyers, delivering a better, 24/7 intelligent sourcing experience to users.

“Supported by the big data generated on the platform, our AI technologies enable the platform to provide product and business matching suggestions for SMEs and prospective buyers alike; the AI-assisted smart sourcing can also screen out false queries and recommend more desirable products to buyers and find more suitable buyers for the SMEs,” added the HKTDC.

AI’s role as businesses go digital

According to a study conducted by KPMG and InvestHK exploring Hong Kong’s vital role in the global

HKTDC will continue to organise online sourcing events to cater to the different sourcing cycles of various sectors

Lorem ipsum dolor sit amet consectetur adipiscing Benjamin Chau, Deputy Executive Director of HKTDC

supply chain in 2021 and beyond, the significant economic impact of COVID-19 has impacted the entire supply chain and this will last for some time to come. Companies have suddenly realised that there is a need to digitise across multiple supply chains, and Hong Kong does need to prepare itself for this new digital era wherein businesses will operate across a seamless global marketplace.

“We must be more agile as we serve those future digital supply chains with next generation data analytics, AI, and automation,” added the HKTDC.

The council also noted that the city is taking the next steps as a global digital supply chain services hub and has embarked on major roles in every link of the manufacturing chain, from product design and development to the delivery of goods to consumers.

“Currently, AI is the primary driving technology of automation in the supply-chain industry; at our upgraded sourcing platform, we deploy AI to identify patterns in data and bring useful insights and hence enable effective business matching between SMEs and prospective buyers from around the world,” said the HKTDC.

Moving forward, the council expects the industry to utilise AI in forecasting demand and providing more personalised services to their customers in the future, hence enabling companies to better manage their supply chain operations and become more efficient and accurate.

“To ensure an effective use of AI technologies, we need a robust database that provides clean and valid data which would allow the generation of meaningful data analytics,” commented the council. “Hence, maintaining valid data and eliminating data silos in the supply chain would be essential to create actionable data for AI technologies to effectively work on.”

The digital sourcing platform in a post-COVID world

Even when physical exhibitions resume, the HKTDC aims to continue to organise regular thematic online sourcing events to cater to the different sourcing cycles of various sectors, providing exhibitors with additional opportunities to connect with global buyers.

“Fully utilising the advantages of online-to-offline promotion, we will carry out digital promotions and business-matching activities before and after the trade fairs, allowing exhibitors to reach out to overseas buyers who are not able to come to Hong Kong and helping to create an extended exhibition experience,” the council elaborated.

The HKTDC also plans to continue enhancing its online services to create more business opportunities for global buyers and suppliers, it concluded.

In the future, physical trade fairs and online platforms will need to integrate and complement each other, the council concluded.

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