What is the potential long-term economic and business impact of the massive protests sweeping Hong Kong? That’s being considered by a number of investment analysts, who have issued quick reports over the past two days.
Not surprisingly, no one is ready to make any hard-fast predictions just yet. That’s because of continuing uncertainty about how long the demonstrations will last and the huge question mark over what steps Beijing may take to contain the unrest. Instead, the reports set out possible scenarios and then take brave stabs at possible economic outcomes.
If the protests keep going—an open question at this point—they would hit the tourism and retail industries of Hong Kong hard, which together comprise about 10 percent of the territory’s GDP, according to estimates from London-based Capital Economics. The two sectors would be “badly affected, as tourists stayed away. Business confidence would also take a dive. With its economy having contracted last quarter, Hong Kong could easily be pushed into recession,” wrote Capital Economic’s Gareth Leather.
There is also the danger that the demonstrations will further damage already strained relations between Hong Kong’s executive and legislative branches, writes Citigroup Asia Pacific economist Adrienne Lui. That could make it difficult for Hong Kong to pass key economic boosting policies while the territory’s “risk premium looks set to rise longer-term as businesses and investors are increasingly building in higher operational risks, fearing that future protests could escalate and turn more frequent.”
The worst-case scenario, of course, would come about if Beijing decides to intervene in a forceful way, most frighteningly by sending in its army or armed police. And that would likely have repercussions far beyond Hong Kong’s borders.
“If Hong Kong’s status as an international financial center were jeopardized by such a nasty turn of events—as it presumably would be—then China’s own economy would suffer,” writes Capital Economics Leather and his colleague John Higgins in a second note released Tuesday. “And if China attempted to resolve the problem in a heavy-handed way, the rest of the world might respond—say by imposing trade sanctions on China, or by seeking to limit her influence in global policymaking.”
“Any sign of growing tension between the rest of the world and a large economic and military superpower like China,” the analysts add, “would surely dull investors’ appetite for risk.”
The demonstrations are so far unlikely to have an impact on Hong Kong’s credit rating, according to a report issued by Fitch Ratings. “We don’t expect the protests to have a rating impact in the short term. It would be negative if the protests are on a wide enough scale and last long enough to have a material effect on the economy or financial stability, but we don’t currently see this as very likely,” wrote Andrew Colquhoun, head of Asia-Pacific Sovereigns at Fitch, which rated Hong Kong AA+ with a stable outlook back on Sept. 15.
Colquhoun then goes on to point out two unanswered questions that could affect Hong Kong’s future credit rating. One is whether the territory’s government is able to command “basic popular consent,” enabling it to carry out needed economic policies such as those dealing with the overpriced housing market, an aging population, and future infrastructure needs. The second question, he notes, is “whether the political stand-off eventually impacts domestic and foreign perceptions of Hong Kong’s stability and attractiveness as an investment destination.” For now, however, investors and business people will have to wait and watch.
