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A pedestrian walking past closed retail shops in Mong Kok on 24 February 2020. Photo: K.Y. Cheng
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Hong Kong is heading for a ‘cataclysmic recession’ as city’s runaway debt service ratio imperils economy, research firm says

  • Hong Kong’s debt service ratio among private non-financial companies is the highest among 32 countries on the BIS list
  • The leverage is concentrated in the property and financial sectors, which account for more than a third of all loans in the city
Dealing with debt
Yujing Liu
Yujing Liu
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Hong Kong’s economy may be headed for a “cataclysmic recession” because private-sector borrowers are being challenged by the city’s worst growth contraction on record from paying off their debt, according to an independent research firm.

Private sector debt by Hong Kong’s non-financial companies soared to a record HK$10.9 trillion (US$1.4 trillion) in the first quarter, the highest since record-keeping began in 1999, according to the Bank for International Settlements (BIS), the central bank of global monetary authorities.

The debt service ratio for the sector – a measure of cost to repay borrowings – rose to a record 29.8 per cent by the end of March, the highest among 32 economies tracked by the BIS. The ratio has almost doubled from about 16.5 per cent a decade earlier.

The findings are a cry out for policymakers’ attention, underscoring the challenges faced by Hong Kong’s businesses as they try to survive a recession left behind by a coronavirus pandemic and almost two years of the US-China trade war. Hong Kong’s government last month extended the loans repayment holiday by two years to provide breathing room for small and medium enterprises (SMEs), defined as manufacturers with fewer than 100 workers, or non-manufacturers with less than 50 employees.

“Hong Kong’s private sector may perpetually leverage itself until debt service burdens reach some, as yet, unknown maximum level, eventually precipitating what would likely become a cataclysmic recession,” according to BCA Research in a note published on Monday.

The risk of a serious credit-driven downturn in the city has risen sharply over the past three years to reach the highest level since 2002 in the aftermath of the Asian financial crisis and the burst of the dot-com bubble, according to the report.

The upsurge is driven almost entirely by the highest cost in history to service Hong Kong’s private sector debt, making the current episode of piling debt more threatening than previous ones, it added.

The Financial Secretary’s Private Office declined to comment. The Hong Kong Monetary Authority is studying the BIS data and may comment on the debt situation, a spokesperson told the South China Morning Post.

External view of the Hong Kong Monetary Authority (HKMA)’s office at the International Financial Centre in Central on 24 October 2012. Photo: Sam Tsang
Hong Kong’s banking sector was among the most vulnerable to a crisis because of rising debts, with both the credit-to-GDP ratio and the debt service ratio “flashing red,” the BIS said in 2018. Total credit to the private non-financial sector equalled to a record 322 per cent of Hong Kong’s gross domestic product by the first quarter of 2020, up from 293 per cent in 2018. The latest ratio only trailed Luxembourg among 43 countries in BIS data.
Now that Hong Kong’s Chief Executive Carrie Lam Cheng Yuet-ngor has postponed her annual policy address, businesses are hoping that the government – backed by one of the world’s wealthiest currency reserves – can extend more of a lifeline and incentives to help them weather the recession.

Hong Kong’s private-sector debt is concentrated in property and financial institutions, totalling HK$2.7 trillion, or 38 per cent of all loans extended by approved financial institutions as of June, according to data by the Hong Kong Monetary Authority (HKMA).

At 29.8 per cent, Hong Kong’s debt service ratio topped Norway’s 27.9 per cent, Netherlands’ 25.8 per cent, mainland China’s 20.3 per cent and the US at 15 per cent.

Hong Kong has the Federal Reserve to thank as a saviour, according to BCA Research, because the city imports its super-easy monetary policy under its pegged system.

The monetary authority will have to follow the US Federal Reserve’s bold plan to keep interest rates at a near-zero level at least for the coming three years, to support a fragile US economy ravaged by the Covid-19 pandemic. This is likely to buy the city some time, as companies will take advantage of the low rates to refinance at cheaper costs.

But this could drive the city’s private firms into a perpetual cycle of increasing leverage because they will face less pressure to deleverage in the short term, BCA Research wrote.

“This suggests that while the cyclical outlook for Hong Kong is either benign or positive, a negative (and potentially horrific) structural outlook is warranted barring a preventive policy response,” it added.

This article appeared in the South China Morning Post print edition as: City warned of a ‘cataclysmic ­recession’ as private sector debt soars
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