IMF: Hong Kong’s economic risks still tilted to the downside

IMF warned that four major risks face Hong Kong though the city’s medium-term potential growth is estimated at about 3%.

The organization points out the following risks in a recently released statement.

Correction in property prices

Despite a series of government measures, property prices rose by 15 % year-on-year in September while the sensitivity of households’ debt service burden to interest rate changes remains high as a significant portion of new mortgages are on floating rates and indexed to the Hibor.

IMF said a disorderly housing market adjustment could have a significant impact on private consumption through negative wealth effects. In addition, even though banks’ balance sheets are currently strong, a disorderly housing price correction could trigger an adverse feedback loop between house prices, debt servicing ability and lower consumption, which would result in weakening growth leading to second round effects on banks’ balance sheets.

Tighter-than-expected global financial conditions

Financial conditions could tighten more than expected if volatility jumps as a result of monetary policy surprises in the U.S. or Euro Area. Unanticipated tightening in financial conditions would weigh on domestic demand and create financial stress in Hong Kong given its highly globally-integrated financial sector.

Disorderly adjustment in mainland China

This would hit the tourism, trading and logistics industries, which account more than a quarter of GDP and employment in Hong Kong. While Hong Kong has benefitted from deepening financial linkages, new spillover channels for volatility and financial stress have been created, including the high and rising exposure of the banking system to mainland China which is  currently assessed to be manageable.

Retreat from cross-border integration

The risk of a shift toward inward-looking policies, including protectionism, is rising in many advanced economies. Such policy shifts would reduce cross-border flows of trade, investment, and labor, which could dampen productivity and global growth. Hong Kong would be negatively affected due to its high degree of openness.

 

 

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