Hong Kong cites SARS outbreak for sharp economic downturn

Hong Kong halved its gross domestic product forecast for the full-year 2003 to 1.5 per cent yesterday, saying the territory's outbreak of SARS (severe acute respiratory syndrome) had caused a sharp fall in the domestic economy starting from mid-March.

The news came as the International Monetary Fund called on the government to introduce tax reforms to protect the longer-term health of the territory's pegged exchange rate mechanism.

"The economic situation worsened abruptly since mid-March upon the spread of SARS, with inbound tourism and local consumer spending being particularly hard hit," the government said.

Hong Kong's SARS outbreak has begun to recede. New infections have been in the low single digits for days, leading the World Health Organisation last week to remove a travel alert on the territory.

However, the outbreak lasted long enough to stall a nascent recovery in the economy.

The government said GDP grew 4.5 per cent year-on-year in the first quarter, slightly exceeding economists' forecasts, but contracted 0.3 per cent compared with the final quarter of 2002 as the SARS outbreak got under way.

In April, the height of the outbreak, visitor arrivals fell by nearly two-thirds, hotel occupancy rates averaged about 20 per cent and unemployment matched a record set last year of 7.8 per cent.

The negative impact spread to trade, with exports of goods growing 10 per cent, about half the rate of the first quarter.

"Overall, the impact of SARS is reckoned to have dragged down GDP in April by around 1.8 percentage points," the government said.

Separately, the IMF, in an annual report on Hong Kong, forecast the territory would grow 2.2 per cent for the full year.

However, it said Hong Kong's growing fiscal deficits in recent years, which reached nearly 5 per cent of GDP in the budget year ending March, could undermine the stability of the pegged exchange rate system in the longer term.

"Fiscal policy will need to be managed carefully to support the linked exchange rate system," the IMF said.

It said Hong Kong should continue to cut civil servants' salaries and should introduce a goods and services tax. - (Financial Times Service)