Sound Financial Sector, Fiscal Policy Boosts Hong Kong SAR

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

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...