Hong Kong should implement supportive fiscal measures next year to allow the territory's economy to recover more strongly, a new report from the International Monetary Fund (IMF) says. It also highlights financial sector risks are building, and warns authorities to prudently manage the spillover effects of new policies designed to prevent overheating in the market for real estate.
The IMF reported that global economic weakness has impacted Hong Kong's economy, leading to modest full-year gross domestic product (GDP) growth estimates of just 1.25%. GDP growth is expected to pick up next year, however, to a rate of around 3%, the report says.
The Fund applauded measures in this year's budget to provide a boost to the local economy, which included increased transfers, additional capital spending, tax relief and reductions in fees. It agreed that the recently adopted Buyer's Stamp Duty and extension of the Special Stamp Duty would dampen housing demand and recommended that, as the full impact of the measures becomes apparent, these levies could be adjusted accordingly.
The Fund recommended that, given the economic outlook, next year's budget should continue to be tilted towards supporting growth. Temporary measures could include reductions to public housing rents or tax relief for households to boost consumption, it suggested.
However, looking at the outlook for the financial sector, the IMF warned that policies to dampen demand for real estate could be detrimental to the stability of the banking system. It highlighted that although the banking system has proved resilient throughout the crisis, a sharp price correction in the real estate sector could increase risks as half of outstanding loans for use in Hong Kong are tied to local property.
The Fund however welcomed a fall in the rate of bank credit growth, a key concern in recent years. The banking system remains well capitalized, putting the territory in good stead to start implementing Basel III capital standards next year, the report said. Nevertheless, the IMF recommended that the Hong Kong Monetary Authority should continue to stress test and closely monitor banks' exposures, and build upon cooperation with China's authorities where appropriate..
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