Hong Kong must pick the right fiscal course to protect growth
Alison Stuart says despite the risks clouding our economic outlook, there are buffers in place and steps can be taken to adapt to long-term changes
As the main trading and financial gateway between mainland China and the rest of the world, Hong Kong’s economy is sensitive to global conditions and developments across the border. As laid out in our recent IMF annual consultation with Hong Kong, the tailwinds that have propelled the economy over the past decade – low interest rates and rapid growth on the mainland – are waning. Growth, which averaged 4.1 per cent between 2005 and 2013, looks to have slowed to around 1.5 per cent last year. With US interest rates heading upwards, and mainland China rebalancing, only a gradual pick-up in Hong Kong’s growth rate can be expected, to 1.9 per cent in 2017.
Three risks cloud the outlook. As the mainland rebalances its economy, which we believe is healthy for China and the region, there could be some bumps along the way. A sharper-than-anticipated US interest rate cycle, or tighter global financial conditions could weigh on domestic demand. The domestic property market – which still looks overstretched – is another source of downside risk.
The good news is that strong policy frameworks and ample buffers are in place to weather a tougher environment. Prudent fiscal policy and sound supervision of the financial system have built buffers, while the linked exchange rate system provides a credible anchor for a small open economy with a large globally integrated financial services industry.
Fiscal and structural policies have a role to play. The fiscal support envisioned in the 2016/17 budget is appropriate and more support may be called for if growth remains weak. For the longer term though, we should be mindful that a rapidly ageing population will substantially weaken the structural fiscal position. Early follow-through on the recommendations of the 2014 report by the Working Group on Long-Term Fiscal Planning can help to alleviate the fiscal impact. Tackling the housing shortage continues to be a major goal of the authorities. Adding to the extensive efforts already under way would have the double benefit of adding to housing supply and boosting growth.
Building on the economy’s natural and historical advantages as a global financial centre will help. Hong Kong has comparative advantages of geographical location, a skilled and well-educated workforce, high legal standards and a common language with its main trading partners. The authorities are developing the asset management industry, encouraging corporate treasury centres to domicile in Hong Kong and supporting development of financial technology, while maintaining its position as the leading renminbi offshore centre.
Hong Kong is well placed to weather the uncertainties ahead.
Alison Stuart is mission chief for Hong Kong at the International Monetary Fund