IMF Commends Hong Kong's Decisive Actions to Bolster Financial Stability
The International Monetary Fund (IMF) in its Staff Report on Hong Kong, commends the measures of the Hong Kong government to contain the contagious risks from the global financial turmoil and reiterated its support for the Linked Exchange Rate system (LERS).
The IMF projects Hong Kong's economic growth to fall noticeably in the coming months amid the still unfolding turbulence in the international financial markets. Consumer price inflation is expected to fall below 3 percent in 2009. In the long run, an economic growth rate of around 5 percent per annum is feasible given the consistent improvements in productivity and overall dynamism and adaptability of the economy.
The IMF recognized that Hong Kong's financial system had performed well and without significant market dislocations. It attributed the resilience to the government's efforts over the past several years to steadily establish a more robust system of financial supervision and regulation and a sophisticated financial infrastructure. The IMF commended the regulatory authorities for their ability to step up supervisory activities in recent months, substantial attention to contingency planning and continued willingness to explore areas for further improvement.
The IMF considered that the 2008-09 Budget and the supplementary package of measures introduced in July should help guard against a more dramatic economic downturn. The IMF called for continued fiscal stimulus in the 2009-2010 Budget with the government targeting fiscal balance or a modest deficit. It also advocated taking a more medium-term perspective, favoring fiscal stimulus through an acceleration of infrastructure investments and possibly a permanent reduction in direct tax rates. The IMF supported reforming the healthcare system and considered that the government had rightly recognized the problem and laid out options that ought to be considered.
The Financial Secretary, John C. Tsang, welcomed the IMF's commendations of the government's policies and measures, saying: "I am confident that Hong Kong's strong fundamentals, sound regulatory framework and prudent risk management by financial institutions will stand us in good stead in tackling the global financial turmoil. Meanwhile, we will continue to implement necessary measures to help those in need during this difficult period," Mr. Tsang said.
The IMF maintained its long-standing support of the LERS, which had proved to be an anchor of monetary and financial stability in Hong Kong over the past 25 years. The Hong Kong dollar continues to be valued broadly in line with economic fundamentals. The IMF also supported the range of actions taken by the Hong Kong Monetary Authority (HKMA) to increase the attractiveness and flexibility of its liquidity support facilities under extraordinary circumstances.
The IMF considered that the banking system remained sound. Hong Kong's banks had managed risk prudently, and were well positioned to handle a worsening in credit quality. The announcement of a time-bound, blanket deposit guarantee and a contingent bank capital facility were fully warranted in the current extraordinary global circumstances.
The Chief Executive of the HKMA, Joseph Yam, said, "I am glad that the IMF supports the range of actions we have taken to sustain confidence in the banking system. We will keep a close eye on global market developments and are prepared to take any further necessary measures to safeguard the stability of the system."
The IMF considered that recent progress in moving towards the adoption of a new competition law that was in line with international best practice would help enhance Hong Kong's competitiveness. It also supported the government's intention to make the minimum wage legislation uniform across employment groupings. The minimum wage should be set at a level to safeguard the interests of lower income workers without materially affecting their employment prospects and the flexibility of Hong Kong's labor markets.
The IMF considered that a broader expansion of communications and infrastructure in the Pearl River Delta would offer significant potential for further growth and development in the region. The IMF also recommended that the government continue to find opportunities to move forward the financial integration process with the Mainland of China and to play a catalytic role in the modernization of the Mainland's financial system and its integration with global capital markets.
The IMF mission visited Hong Kong from October 20 - 30 this year to conduct the Article IV consultation discussions.
The IMF's Staff Report is available online at http://www.imf.org/external/country/HKG/index.htm
Hong Kong Monetary Authority: http://www.info.gov.hk/hkma/
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