IMF Sees Gradual but Uneven Recovery for Hong Kong SAR Economy

January 10, 2025 — The International Monetary Fund (IMF) has concluded its 2024 Article IV mission to the Hong Kong Special Administrative Region (SAR) of the People’s Republic of China, releasing a concluding statement outlining its preliminary findings. The IMF staff observed a path of gradual but uneven recovery for Hong Kong’s economy after a period of significant shocks.

Recovery and Headwinds:

Hong Kong’s economy is recovering from a three-year recession triggered by various shocks since 2019. While the lifting of COVID-related restrictions in early 2023 spurred a strong rebound in domestic demand and tourism, the recovery has since faced headwinds. These include high interest rates, a prolonged property sector adjustment, and a challenging environment for small and medium-sized enterprises (SMEs). Despite these challenges, the financial system has remained resilient, supported by robust institutional frameworks, ample policy buffers, and the stable Linked Exchange Rate System (LERS).

Emerging Challenges:

The IMF highlighted several emerging near- and long-term challenges. Increased economic and financial integration with Mainland China has made Hong Kong more susceptible to Mainland-specific risks, such as the housing market downturn and rising geoeconomic fragmentation. Traditional growth drivers like logistics and trade face increasing regional competition, while rapid population aging and slowing labor force growth also pose significant challenges.

Economic Outlook:

Real GDP growth is projected to moderate gradually. After an estimated 3.3 percent growth in 2023, growth is expected to decelerate to 2.7 percent in 2024 and remain at that level in 2025. This moderation reflects waning post-reopening momentum, high interest rates, a strong Hong Kong dollar, and weakening external demand, including from Mainland China. Over the medium term, growth is projected to converge to a potential rate of about 2½ percent by 2029, due to demographic factors and slower capital accumulation. Inflation is projected to gradually increase and stabilize at 2.5 percent.

Risks to the Outlook:

The IMF identified several downside risks, including a sharper-than-expected slowdown in Mainland China, slowing global growth, prolonged tight monetary policy in the U.S., increasing geopolitical fragmentation, and systemic global financial instability. Upside risks include improved consumer and business confidence in Mainland China, better market access, deeper integration with the Greater Bay Area (GBA), increased investment in high-value industries, and sustained inflows of skilled workers.

Fiscal Policy and Financial Stability:

The IMF deemed the authorities’ gradual medium-term fiscal consolidation path appropriate given the current economic conditions. However, it emphasized the need for increased revenue mobilization to address aging-related spending pressures and support key spending priorities. Suggested measures include increasing the progressivity of personal income taxes, raising excise taxes, and introducing taxes on capital gains and dividends.

The IMF assessed risks to the banking sector as manageable, given strong capitalization, liquidity, and profitability. However, it called for continued monitoring and management of deteriorating debt repayment capacity in the nonfinancial corporate sector, particularly among real estate developers and SMEs. The HKMA’s decision to adjust the Counter-Cyclical Capital Buffer (CCyB) rate was welcomed, with the IMF advising that further releases of capital buffers should be reserved for periods of broad-based financial stress. Close monitoring of risks in nonbank financial institutions (NBFIs) was also recommended.

Property Market and International Financial Center:

The IMF supported the recent relaxation of housing measures, given easing risks in the property market, but cautioned against further easing that could encourage excessive risk-taking. It also highlighted the need to boost public housing production and enforce eligibility criteria to address affordability pressures.

The IMF commended Hong Kong’s efforts to develop a vibrant but well-regulated digital finance ecosystem and a sustainable finance hub. It stressed the importance of a comprehensive regulatory strategy for crypto assets, enhanced climate information infrastructure, and continued integration of climate risks into financial institutions’ risk management practices.

Ensuring Sustainable Growth:

The IMF emphasized the need to boost the supply and quality of labor to mitigate aging-related pressures and lift medium-term growth prospects. It also highlighted the potential of the GBA initiative to drive growth and address regional competition. Finally, the IMF urged more proactive measures to address climate change, including regional collaboration on renewable energy, improved energy efficiency, and incentivizing green transportation.

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