Hong Kong's economy will experience further deterioration, with severe deflation and a cash flow-triggered crisis putting further pressure on the currency peg, according to a Credit Suisse First Boston (CSFB) economist. Speaking at an economic outlook seminar yesterday, Dong Tao predicted the SAR's gross domestic product would shrink to minus 5.2 per cent and drastic action might be called for to stem the slide. Mr Tao said the Government's most recent package of measures aimed at fighting off short sellers was 'probably the best move by the Hong Kong Monetary Authority in the past 12 months' and would stabilise the monetary environment. However, the package would not be sufficient to turn around the economy's performance or market perceptions of Hong Kong, Mr Tao said. 'This will put confidence in the peg to the test,' he said, adding that scrapping the link between the local currency and the US dollar was not the solution to the problem. Such a move would result in interest rates remaining high, steep inflation and a debt crisis, Mr Tao said. Instead, he suggested a third option - dollarisation of the Hong Kong currency - should be considered as a way of stabilising the economy. CSFB figures indicated the implications of the peg remaining. GDP would slide to minus 6.4 per cent if the peg remained, but would only be minus 5.5 per cent under dollarisation, Mr Tao said. However, if the currency was depegged, GDP could fall to minus 10 per cent, he said. Converting Hong Kong dollars into US dollars was 'technically feasible' and commercially viable but politically complex, he said. The main benefit would be the immediate easing of pressure on local interest rates, which CSFB expects to reach 13 per cent next year.