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Strong measures should be taken if city badly affected by slowdown in Europe, says fund

The International Monetary Fund (IMF) warned on Wednesday that Hong Kong faces the possibility of a recession should a worse-than-expected economic slowdown in Europe occur.

It recommended that the SAR government embark on "significant and immediate fiscal stimulus" should downside risks in Europe due to the debt crisis become a reality, a scenario that would hit Hong Kong hard as it is heavily reliant on its trade and financial sectors.

The fund also warned that Hong Kong banks are faced with an increased risk of bad loans as credit has been growing at an "extraordinary" pace, particularly for foreign currency. The loan-to-deposit ratio in non-yuan foreign currency has risen to around 63 percent, 20 percent higher than a year ago.

In its latest annual review of the city's economy, the IMF said that the global economy has reached a "dangerous point". It said in the report that a sudden downside shock radiating from Europe would reduce global growth by around 3 percentage points, while Hong Kong would fall into recession with growth dropping 4 to 4.5 percentage points below its baseline forecast. The IMF expects Hong Kong's gross domestic product to expand 5.75 percent this year and slow to 4 percent in 2012.

The fund thinks that local policymakers have a formidable arsenal of policies at their disposal, however. Should external risks materialize, responsive measures could include reductions in taxation (particularly for salaries and profits taxes), direct transfers to households (especially to the poor, elderly and other groups most exposed to a deteriorating economy), and fiscal support for smaller enterprises (including through loan guarantees).

Both John Tsang, the financial secretary, and Norman Chan, chief executive of the Hong Kong Monetary Authority, responded by saying that the government will keep a close monitor on possible external headwinds and "roll out due measures if needed".

Hong Kong's economy narrowly missed a technical recession in the third quarter, growing a scant 0.1 percent quarter-on-quarter after contracting 0.4 percent in the second quarter, according to statistics released by the government Nov 11. Buoyant domestic consumption and inbound tourism helped partially offset the slowing export growth.

"External volatility is likely to weigh on the local economy, especially the export sector, for the remainder of 2011 and extending into the beginning of 2012," said government economist Helen Chan last week.

Though domestic consumption will serve as a counterbalance, its support may run thin. According to Kevin Lai, economist at Daiwa Capital Markets, private consumption usually lags external demand by one to two quarters, which means that depressed external demand will have a significant impact on household income and hit domestic consumption eventually, given that Hong Kong is an external-driven economy.

The IMF believes that the government will register a significant surplus this year, once again outperforming budget targets. It called for future fiscal support to be focused on lower income groups.

On the property front, the fund credited government measures in the past year such as its anti-speculation taxes and boosting land supply in a bid to ease soaring house prices. However, drivers of asset bubble risks remain in place, it said, urging data-driven policies in the coming months.

joyli@chinadailyhk.com

China Daily

(HK Edition 11/17/2011 page2)