Typical street scene in Santa Ana, El Salvador. (Photo: iStock)

Typical street scene in Santa Ana, El Salvador. (Photo: iStock)

IMF Survey : Hong Kong SAR: Growing Despite Uncertainties

January 19, 2016

  • Economy has strong buffers, but faces multiple challenges
  • Higher interest rates could leave households and corporate sector exposed
  • Property sector appears to be slowing

Despite being repeatedly buffeted by powerful global cross-currents, Hong Kong SAR’s economy has grown steadily in recent years, according to IMF economists.

Hong Kong high rises: There are early signs that the property sector is beginning to slow, says IMF (photo: Jürgen Effner/dpa/Corbis)

Hong Kong high rises: There are early signs that the property sector is beginning to slow, says IMF (photo: Jürgen Effner/dpa/Corbis)


In their yearly report on the economy of Hong Kong SAR, the IMF economists noted that it faces multiple challenges related to the domestic property sector, the slowdown in Mainland China, and the increase in U.S. interest rates.

While the economy is entering a potentially testing period ahead, the risks are manageable with the strong buffers in place, thanks to deft policy management and ahead-of-the-curve regulatory standards,” said Malhar Nabar, head of the team for Hong Kong SAR.

“The region is expected to grow at 2½ percent in 2016, marginally higher than in 2015,” he said.

Spillovers from China: strong and may intensify

The report noted the decline in tourists from the Mainland and re-exports to and from the Mainland.

“Mainland visitors accounted for around 40 percent of overall retail sales in 2014, up from almost 25 percent in 2009. A downturn on the Mainland therefore also hurts tourism and retail sales in Hong Kong SAR,” said Nabar.

The report also identified the closer financial integration with the Mainland through various channels, including banking claims, offshore U.S. dollar securities issuance, offshore RMB business, Shanghai-Hong Kong Stock Connect, and Mainland-Hong Kong Mutual Recognition of Funds.

“The integration has brought several benefits to Hong Kong SAR, but also leaves it vulnerable to inward spillovers,” said Nabar.

“If high-frequency indicators in early 2016 point to a significant weakening of activity, the FY2016/17 budget should proactively provide additional support than currently envisaged, with an emphasis on expanded relief measures for vulnerable households, small businesses, and accelerated urban renewal and infrastructure spending where possible,” he said.

Rising cost of debt with higher interest rates

The assessment noted that the high household and corporate leverage leave the private sector exposed to rising debt service costs in the event of a sharper-than-anticipated rise in interest rates. Private consumption would be disrupted if interest rates were to spike. Rising costs of refinancing and rolling over corporate debt could inhibit investment.

“The dynamism of Hong Kong SAR’s small open economy as an international trading and tourism hub, and premier financial center also leaves it exposed to global economic forces beyond its control, and place a premium on contingency planning,” said Nabar.

The report suggests that there is a low probability of a perfect storm, in which a sharper-than-expected slowdown on the Mainland could coincide with a turbulent turn in global financial markets following the interest rate rise by the U.S. Federal Reserve. But in the event, a range of measures may need to be deployed to forestall a deep slide in activity in Hong Kong SAR.

These might include a large and proactive fiscal stimulus, expanded credit guarantees for SME loans together with loosening of macroprudential policies.

“The experience of 2008/09 suggests that a comprehensive policy response can contain the domestic fallout of a large global shock and quickly set the economy back on track,” said the mission chief.

Slowing property sector shows potential for pick up

The property sector remains the principal source of domestic economic risk, according to the report, although the probability of a correction significant enough to have broad macroeconomic and financial repercussions is low in the near-term.

While there are some early signs that the property sector is beginning to slow, the potential for a renewed pick up remains high considering the underlying demand pressures and tight supply.

The report noted that the appropriate macroprudential policies, including tighter ceilings on mortgage loan-to-value and debt-service-to-income ratios—had helped protect financial stability by strengthening banks’ mortgage loan origination standards without getting in their way of intermediating credit to the real economy. The report also noted that the stamp duties have helped curb excess demand by limiting speculative transactions.

“Adjustments to these duties could be considered if there is a sustained decline in transactions volumes with the potential to generate adverse spillovers to the broader economy,” said Nabar.

“The property-related macroprudential measures should continue to remain in place; any adjustments should be made based on evolving financial stability risks and not in response to aggregate demand developments,” he added.

Currency regime

The IMF maintained its support for Hong Kong SAR’s currency regime, the Linked Exchange Rate System (LERS), which pegs the Hong Kong dollar to the U.S dollar, as the best arrangement for Hong Kong SAR.

“Fluctuations in the foreign exchange and capital markets, including the recent exchange rate movement, are outcomes of portfolio adjustments that can occur from time to time in a highly open, globally integrated economy,” said Nabar. 

The report noted that the smooth functioning of the LERS derives from the robust institutional, legal and policy framework in place in Hong Kong SAR, the ample fiscal reserves available to cushion the economy from adverse shocks, the healthy financial system that can accommodate large portfolio adjustments, and, more generally, flexible asset, goods, and labor markets that can adjust quickly to ensure misalignments in the real effective exchange rate do not persist.