HK considers infrastructure bonds, but focuses reserves on Covid-19 recovery

Financial secretary Paul Chan Mo-po's comments were made in an interview with the South China Morning Post in which he admitted that the Hong Kong economy could run at a deficit of more than HK$276.6 billion ($35.68bn) over the course of the next financial year.

Chan said "society will be more accepting" of the Hong Kong government "issuing bonds for future investments", such as major rail improvement projects, than for financing the anticipated deficit, which he warned would represent an unsustainable "fiscal philosophy".

"The market may misinterpret that the government is loosening our financial discipline in order to fund the deficit," Chan said, according to Post' report.

Project finance expert John Yeap of Pinsent Masons, the law firm behind Out-Law, said he could understand the split policy on the issuing of bonds in the current economic circumstances.

Yeap said: "Covid-19 is spurring governments globally to spend their way through the pandemic, and the bond market could be one source of funds. However, as the financial secretary has stated, bond issuance to fund a current deficit may not be viewed as prudent. On the other hand, given the government’s need for capital for future infrastructure developments, the issuance of infrastructure bonds could enable the government to free up the city’s reserves."

"In order for an infrastructure bond issuance to be successful, the underlying infrastructure must be capable of generating a steady long term return, and Hong Kong’s proposed rail network extensions, operated by a world class operator with a proven track record should be capable of attracting capital providers, particularly if the post-Covid-19 economic norm remains uncertain, perpetuating longer term volatility in the equity markets," he said.

"Fitch has, however, lowered the city’s credit rating to AA minus, putting it on par with the UK. Bond financing costs will naturally be impacted if ratings do not recover," Yeap said.