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Growth in Hong Kong to slow due to rising interest rates
03 Feb 2016, 07:55 pm
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SINGAPORE (Feb 3): Tightening monetary conditions as a result of a surge in capital out of Hong Kong so far this year will put pressure on domestic consumption and crimp private investments in the island economy, economists from Bank of America say.

As of Jan 25, Hong Kong’s aggregate balance, the amount in the clearing and reserve accounts maintained by commercial banks with the central bank, had declined by HK$21 billion ($3.9 billion) since the end of last year, indicating that capital outflows are outpacing inflows.

In response, the Hong Kong Interbank Overnight Rate, or HIBOR, has risen, by 30 basis points since the end of 2015 to 0.697%. Against mounting economic uncertainty in China, Bank of America reckons HIBOR could rise to 1.9% by the end of this year, up from its previous forecast of 1.45%.

Negative impact
But higher interbank rates in Hong Kong are likely to have a negative impact on the economy. For one thing, the burden from mortgage repayments will rise, discouraging consumer spending. Already household debt in Hong Kong stands at 67% of GDP as at 3Q2015, compared to 76.5% in Japan and 87.6% in South Korea.

While multiple rounds of property cooling measures have been implemented to contain the debt-service burden among new borrowers, Bank of America reckons residential property prices in Hong Kong could fall by as much as 20%-30% in the coming years, as prospective buyers delay investments in new homes as a result of the higher rates.

Private sector investment growth will also take a hit, as rising borrowing and refinancing costs could suppress demand and risk appetites. Meanwhile, corporate debt has also been on the rise in recent years as more Hong Kong companies expanded to the Mainland, where growth has slowed markedly.

Fiscal expansion
In that light, Bank of America expects that the government could roll out more expansionary fiscal policies to support investment growth. It notes that Hong Kong is sitting on “ample” fiscal reserves, at 35% of GDP, and minimal government debt of around 0.1% of GDP.

As a whole, Bank of America is expecting Hong Kong to grow by 2% this year. Hong Kong’s economy expanded by 2.5% year-on-year in real terms in the first three quarters of 2015, on par with growth in 2014. Its economy is forecast to grow by 2.4% in 2015.

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