Be ready for Europe fallout, I.M.F. tells HK

The Hong Kong government should be ready with a range of contingency measures if the global economic outlook continues to worsen, the International Monetary Fund said yesterday.

While Hong Kong still enjoyed relatively strong income growth and low unemployment, fallout from the European sovereign debt crisis could crimp funding sources for banks, weaken exports and slow economic growth, the Washington-based bank said in a report.

It forecast that the city's economic growth will fall to 4 per cent next year from 5.7 per cent this year and 7 per cent last year, and warned that a recession could not be ruled out.

'Given the uncertainty about global growth prospects, a recession next year is a clear and tangible risk for Hong Kong,' Nigel Chalk, the IMF's mission chief for China and Hong Kong, told the South China Morning Post.

Banking giant HSBC has also warned of the risk of recession. In October, it cut its growth forecast to 5 per cent from 6.5 per cent for this year, and to 4.5 per cent from 5.4 per cent for next year.

An economy is technically in recession if quarter-on-quarter growth falls for six months. Hong Kong narrowly escaped a recession, with its economy growing 0.1 per cent in the third quarter from the previous three months, although it grew 4.3 per cent when compared to the year-earlier quarter. Economic output contracted by 0.4 per cent in the second quarter from the first three months.

The IMF forecast that Hong Kong's net export growth would slow to 0.1 per cent next year from 0.4 per cent this year and 0.3 per cent last year, on weak overseas demand.

Sean Craig and Andre Meier, theIMF's resident representatives in Hong Kong, said the main impact of the European sovereign debt crisis on the city would be higher US dollar funding costs, especially at European banks that faced a credit crunch in their home market. That meant they would have to reduce lending in Asia, potentially cutting new credit sharply, but Asian rivals would eventually absorb their market share.

To pre-empt this, the Monetary Authority last month required banks to more closely match the duration of their loan portfolio with funding sources. Still, the government should consider adopting various contingency measures, the IMF said.

'If the global outlook worsens significantly, fiscal stimulus, extraordinary support to the financial system, and a roll-back of recent macro-prudential measures linked to the property market could be considered,' the IMF said yesterday.

These include tax cuts, direct money transfers to households, using resources of the government's Exchange Fund to shore up banks' capital, and reintroducing a guarantee of bank deposits.

Other measures would include scrapping extra stamp duty imposed for quick resales of property and a tightening of limits on loan-to-value and debt-to-disposable-income ratios for home loans.

Financial Secretary John Tsang Chun-wah on Thursday told Bloomberg the government would take 'counter-cyclical' measures in the housing market if the economic environment worsens. A government official said that was a reference to tighter loan-to-value ratio limits imposed last year.

The same day, housing secretary Eva Cheng said special stamp duties imposed for two years might be reviewed earlier than planned. A spokesman later said she was merely restating existing government policy.