ECONOMIC HEALTH CHECK
Sound Financial Sector, Fiscal Policy Boosts Hong Kong SAR
By Mali Chivakul
IMF Asia and Pacific Department
May 23, 2014
- Hong Kong SAR recovery from 2012 slowdown features low unemployment, stable inflation
- Robust financial sector has strong supervision, meets highest international standards
- Fiscal policy should address social needs while meeting commitment to low taxes, fiscal prudence
Hong Kong SAR’s economy is predicted to grow by 3¾ percent this year, up from 1¼ percent in 2012, and the special administrative region is likely to enjoy low levels of unemployment and stable inflation, according to an IMF report.
In their annual assessment, the report’s authors say they expect the economy of Hong Kong SAR, to continue recovering from the 2012 slowdown, but this favorable outlook is tempered by possible domestic and external risks.
The main domestic risk continues to be an abrupt property price correction, while external threats include the likely normalization of the U.S. Federal Reserve’s monetary policy, and developments on the Mainland.
As a small and highly open economy, the outlook of Hong Kong SAR is heavily influenced by external developments, especially those in Mainland China and the United States.
Strong framework to manage risks
Hong Kong SAR has a robust policy framework to deal with risks and has built up appropriate buffers to absorb shocks, says the report.
A strong fiscal position, which allows for a credible counter-cyclical fiscal policy, a well-supervised financial system, and flexible domestic markets have underpinned the Linked Exchange Rate System (LERS), which in turn provides a robust policy anchor.
In recent years, counter-cyclical prudential policies have built buffers in the financial system that could help absorb a correction in domestic property prices. The report says these prudential measures should be unwound when systemic financial sector risks ease.
The stamp duties put in place—or increased—during the property boom could be eased as needed to promote an orderly adjustment of the property market, say the report’s authors.
Stress tests underline strong financial sector
Stress tests conducted under the IMF’s Financial Sector Assessment Program suggest that the financial sector could withstand many possible adverse shocks, including a global slowdown and property sector price correction.
They indicate that the banking system is also resilient to changes in global liquidity as a result of the U.S. Fed’s exit from unconventional monetary policy.
Hong Kong SAR’s close links to the Mainland poses both risks and advantages, and its impact will depend largely on China’s growth and reform program. Full implementation of reforms in the Mainland could, in the medium term, lift Hong Kong SAR’s GDP, suggests the report. But, in the near term, reforms may slow growth both in the Mainland and Hong Kong SAR.
Fiscal policy in a long-term framework
The report backs plans by the authorities to unwind the recent fiscal stimulus measures as the economic recovery takes hold, and welcomes efforts by the Working Group on Long-Term Fiscal Planning to cast Hong Kong SAR’s fiscal challenges in a long-term context.
Future fiscal policy will need to strike a balance between addressing the needs of an aging population and rising inequality, while fulfilling the authorities’ commitment to low taxes and fiscal prudence, says the report.
It adds that there may be scope to reprioritize spending and efficiency gains in existing social programs, and an ongoing need for public discussion about the trade-offs involved with long-term spending pressures, and the need to preserve fiscal prudence.
Robust financial sector
The IMF also released a report on the health of the Hong Kong SAR’s financial sector with the Financial Sector Stability Assessment. The FSSA finds that Hong Kong SAR’s regulation and supervision framework of the financial sector is of a high caliber, with bank supervision and regulation among the best in the world. The priorities for improvement are in the area of the financial sector resolution regime and insurance sector regulation and supervision.
Both the regular report and the FSSA suggest that Hong Kong SAR will continue to benefit from deepening financial linkages with the Mainland, including through the offshore Renminbi market.
But both reports also point out that the large and rapidly growing exposure to the Mainland increases the potential for higher RMB volatility to impact the offshore market. This requires close monitoring and cooperation with Mainland supervisors, say the reports authors.