HK may fall into recession, says I.M.F.
Hong Kong could slide into a recession next year because of depressed trade and instability in the financial sector, the International Monetary Fund warned.
In a report released yesterday, it said the rapid growth in bank loans also raised the risk of rising bad loans.
'Credit has been growing at an extraordinary pace, particularly for loans in foreign currency,' the IMF said. 'International experience would suggest that this rapid pace of credit growth has the potential to lead to a worsening of average credit quality, particularly if the business cycle swings to reverse.'
The IMF also cautioned that Hong Kong's growth would slow to 4 per cent next year, or even become negative, should the euro-zone crisis spin out of control and hurt the city's trade and financial sectors.
The warning comes a week after Chief Executive Donald Tsang Yam-kuen said Hong Kong might see 'a couple of quarters of bad times', amid a 50 per cent chance that the global economy could shrink.
'We try and quantify these downside risks using a scenario in which the Europe debt crisis reduces global growth by 3 percentage points, which results in a fall in Hong Kong growth of 4 to 4.5 percentage points,' said Sean Craig, the IMF's representative in Hong Kong.
'In this unlikely and extreme scenario, growth could be slightly negative for the year, but still much better than the sharp fall we saw in the first quarter of 2009.'
Craig said the IMF's assessment was that Hong Kong was performing very well economically. However, as a small, open economy it was highly vulnerable to shocks.
Raymond Yeung, senior economist for Greater China at ANZ Research, said Hong Kong's gross domestic product growth could ease to 3.9 per cent next year. But he did not rule out the possibility of a recession in Hong Kong matching the magnitude of the post-financial crisis period, when GDP shrank by 3.5 per cent in the first quarter of 2009.
Hong Kong's growth, he said, would depend on whether there would be a liquidity injection by European governments, the outlook of America's economy, and Beijing's monetary policy. Hong Kong's banking sector was faced with a 'mismatch of currencies', he said, as banks were grappling with a shortage of Hong Kong dollar deposits and an increase in the cost of capital.
The Hong Kong dollar loans-to-deposit ratio had been steadily increasing since 2009, reacting to Beijing's credit tightening policy, which drove up mainland borrowing from Hong Kong and prompted investors to save in yuan instead of Hong Kong dollars. Hong Kong's liquidity further declined as international investment activities faltered.
The Hong Kong dollar loan-to-deposit ratio was 86.6 per cent in September, compared with 77.6 per cent at the same time last year, and 70.2 per cent in 2009.
In April, the Hong Kong Monetary Authority, the city's de facto central bank, asked lenders to review their funding plans because it was concerned that the 'unsustainable' credit growth would cut into liquidity and loan quality.
Sabine Bauer, a director at ratings agency Fitch's Asia financial institutions group, said loan growth was likely to weaken if global trade slowed, because short-term trade financing made up a significant portion of the growth in Hong Kong banks' loans this year and last year.
But the slowdown in exports could also lead to a deterioration of credit quality, Bauer said, because it would dent the ability of mainland firms to repay their loans.
Number of years the currency peg has operated. It 'remains the best option for the city's economy', according to the IMF