Economists watch for impact of Hong Kong crisis

By Mark T. Amoguis
Senior Researcher

HONG KONG is one of the Philippines’ bigger investment and trading partners, but a recession there — as warned last week — will likely have limited direct impact on the latter’s economy, ranking state as well as private sector economists said in recent interviews.

Reuters reported on Aug. 16 that Hong Kong could be “on the verge of its first recession in a decade” as anti-government protests, which have marked their 11^th week, scare away tourists and weigh on retail sales.

“Should Hong Kong fall into a recession given recent developments, it would be difficult to comment on the possible duration of such, while its impact on the Philippine economy will depend for the most part on how deep the recession will be,” Bangko Sentral ng Pilipinas Deputy Governor Francisco G. Dakila, Jr. said in an e-mail.

At the same time, Mr. Dakila flagged potential indirect risks, saying that “overall, while the emerging risk to the Philippine economy arising from the slowdown of the Hong Kong economy may appear manageable over the near term, it remains prudent to continue to monitor possible escalation of the ongoing civil unrest and its potential adverse impact on global and regional sentiment, which may affect prospects for the domestic economy as well.”

Hong Kong’s economy grew 0.5% annually last quarter, revised from the previous estimate of 0.6% and lower than the first quarter’s 0.6% as it reeled from the impact of the US-China trade war and a slowing China economy. On a quarterly basis, its economy was revised to a 0.4% drop in the second quarter from initial estimate of a 0.3% contraction. Two successive quarterly contractions would meet the conventional definition of a recession.

Official growth data have yet to account for the economic effects of confrontations between police and protesters that plunged the Asian financial hub into its worst crisis since it reverted in 1997 to China’s hands from British rule.

“Nonetheless, we see that the main transmission channel of such impact would be on trade, particularly exports,” Mr. Dakila said, saying that Hong Kong has accounted for about 13% of total Philippine goods exports and three percent of total Philippine goods imports.

“Investments will likewise be possibly affected.”

He also noted that Hong Kong accounted for five percent of total gross foreign direct investments (FDI) inflows for the first five months of 2019 and about six percent of total gross foreign portfolio investment inflows last semester.

“Finally, given that Hong Kong is host to a significant number of overseas Filipino workers (OFWs), another possible risk transmission channel would be remittances,” said Mr. Dakila, who oversees central bank’s monetary and financial policy, international monetary affairs, loans and credit, as well as economic and financial literacy.

Over the past five years and last semester, he said, Hong Kong accounted for about three percent of OFW remittances.

National Economic and Development Authority Undersecretary Rosemarie G. Edillon also said that any downturn in Hong Kong’s economy “will not have significant impact” on the Philippines, even as she noted that Hong Kong makes up about 12% of the Philippine export market and brought in $270 billion in FDI net inflows in 2018, following Singapore.

Ms. Edillon added that Hong Kong is a “big” source of cash remittances, albeit less than three percent of the total. Hong Kong was the tenth biggest source of cash remittances last year with $845.147 million. Last semester, money sent home by OFWs in Hong Kong amounted to $412.636 million, the eighth biggest source of such inflows to date.

Last year, Hong Kong recorded the second biggest FDI net inflows of $270.19 million, following Singapore’s $935.62 million. Last semester, it was the eighth biggest FDI source at $17.38 million.

Hong Kong was the fourth largest buyer of Philippine goods at $4.415 billion last semester, while it was the tenth biggest import source as it sold the Philippines $1.658 billion worth of goods.

Jeff Ng, Continuum Economics’ chief economist for Asia, similarly sees “limited impact” on the Philippines from a possible recession in Hong Kong, noting that the Philippines relies more on the United States and the Middle East for remittances.

He also cited Japan, US, China and Singapore as other key FDI sources.

He said that the Philippines trades more with China and Japan (accounting for 20.5% and 10.2% of total trade, respectively), compared to Hong Kong (6.9%).

“Hong Kong may fall into a recession at the worst or a slowdown at best. The Hong Kong slowdown/recession should persist in H2-2019 and 2020. This should have a small impact on the Philippines. Philippines will be more affected by US-China trade war and China slowdown,” Continuum Economics’ Mr. Ng said in an e-mailed response to questions.

For his part, Rajiv Biswas, IHS Markit’s Asia-Pacific chief economist, said in an e-mail: “Due to the impact of the US-China trade war and the political protests, Hong Kong’s economy has been badly hit, with GDP contracting in Q2 2019 and likely to also contract in Q3 2019.”

“This means that Hong Kong will most likely enter a technical recession, which could have some negative impact on Filipino workers in Hong Kong, especially in sectors like hotels and retailing if tourism is significantly disrupted.”

In terms of trade, “[w]ith Hong Kong’s economic growth badly hit this year and the Hong Kong economy likely to be in recession, this will have a negative impact on exports from the Philippines to Hong Kong,” Mr. Biswas said, noting that the territory is an important trade partner for the Philippines, with total bilateral trade exceeding $13 billion per year.

“For remittances,” Ruben Carlo O. Asuncion, chief economist at UnionBank of the Philippines, Inc., said in a separate e-mail, “Middle East sources are still bigger compared to HK remittances”; hence, “[i]f recession hits (Hong Kong), impact (on the Philippines) would be marginal.”

Alex Holmes, Asia economist at Capital Economics, said via e-mail that a Hong Kong recession would probably be a “small negative” for the Philippines and that “the impact is unlikely to be large enough to change the overall outlook for the Philippine economy.”

“Slower growth would obviously weigh on remittance growth from Hong Kong,” Mr. Holmes said.

“But remittances from HK accounted for only about three percent of the Philippines total last year,” he added.

“While HK is a major source of FDI into the Philippines, I doubt a slowdown in Hong Kong’s economy would adversely affect those flows. Capital tends to be mobile and would probably find other routes into the Philippines if Hong Kong conduits suffered disruptions,” he explained.

“Recession/slower growth in HK would have a negative impact on Philippines exports to HK. Exports to HK accounted for roughly 10-15% of the total last year, but this figure probably overstates the actual demand originating from HK, as it is a transshipment hub.”