if it is contained within two months, the sars virus will not put hong kong's economic fundamentals at damaging risk
The Severe Acute Respiratory Syndrome (Sars) virus is having a strong effect on the Hong Kong economy ' 2003 GDP forecasts have been downgraded and the budget deficit is likely to widen. So far, the main impact has been on the domestic economy with the travel and tourism industry being the worst hit.
The full impact of the virus will depend on how quickly it is contained. According to Andrew Clare, financial economist at Legal & General, there are three shocks the Sars virus is having on Hong Kong's economy.
First, on the labour side, people falling ill has an impact on businesses and also cuts the ability for consumers to spend money.
Denise Yam, economist at Morgan Stanley, said: 'Employees required to take unpaid leave will see a drop in their spending power, while businesses will struggle to survive if sales suffer for an extended period.'
Second, Clare thinks Sars has impacted consumers' consumption habits as regards the travel, tourism and entertainment sectors.
The World Health Organisation has announced non-essential travel to Hong Kong should be postponed. Tourists have been kept away from Hong Kong, and local consumers away from restaurants, bars, cinemas and shopping malls.
Samir Mehda, director at Lloyd George, said: 'Cathay Pacific has cancelled 42% of its flights and there has been a leaked memo stating it may have to ground the whole fleet in May if the situation becomes worse. The occupancy rate of the Ritz Carlton is now only 10%.'
The third impact, according to Clare, has been on the production side. If Chinese producers cannot produce goods, companies may go elsewhere for services.
To take account of the first-round impact of the Sars outbreak, Morgan Stanley has cut its 2003 GDP forecast for Hong Kong by 0.9% in nominal terms to 0.2% and 0.6% in real terms to 2.1%.
Yam thinks another round of revisions to GDP forecasts would be necessary if the epidemic lasts longer, especially if it puts a brake on business flows between Hong Kong and the rest of the world, and slows the pace of economic integration in the region, particularly with mainland China.
Major rating agencies have also raised concerns about the impact of the Sars outbreak on Hong Kong's growth and credit outlook, although the current consensus is that ratings would be changed only if the problem persists for much longer.
According to Yam, extra spending and revenue shortfalls resulting from Sars will likely widen the budget deficit for Hong Kong in 2003-04.
The view at Morgan Stanley is that short-term relief such as one-off concessions could be used to give the economy some support this year, although plans for medium-term deficit resolution such as tax hikes should not be scrapped. Some of the individuals, families and businesses affected by Sars may be in need of financial assistance. But it depends on how long until Sars is brought under control.
Yam said: 'Should the virus be brought under control within the next two months, Hong Kong's economic fundamentals should not be jeopardised.'
According to Clare, compared to the Hong Kong flu epidemic in 1968 when 700,000 people died, the impact of Sars is yet still not that great. The problem is no one knows how long Sars is going to be with us.
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