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An International Monetary Fund (IMF) Staff Mission to Hong Kong has welcomed the Government's efforts in further strengthening market infrastructure and promoting the financial integration with the Mainland, which are key to Hong Kong's competitiveness.
The Mission expects the Hong Kong economy to grow by 5.5%-6% this year, and around 5% in 2007 and over the medium term. The main near-term risks to this outlook are a sharper slowdown in global demand, particularly in the US, and a rise in protectionist sentiments against the Mainland. Over the medium term, growth prospects will depend on how well the evolving financial integration with Mainland China is managed and expanded, and competitive pressures from other regional financial centres withstood.
The Mission recognises that, in addition to a strong external environment, skilful macroeconomic management, continued strengthening of financial market infrastructure, and the underlying flexibility of Hong Kong's markets were key in the remarkable turnaround of the economy from the situation three years ago. The Mission also endorses the general policy framework of the Government, including its fiscal and exchange rate systems.
The assessment was made by the IMF Mission in their Concluding Statement published today (November 7), following the completion of the 2006 Article IV Consultation, which involves an annual review of Hong Kong's exchange rate, fiscal and structural policies.
The Mission believes a positive outturn of above 0.5% of GDP is likely this fiscal year. While there is little risk to fiscal sustainability, over the medium-term the budget will likely face rising aging-related spending pressures, and continued revenue volatility will have to be managed.
The Mission welcomes the public discussion on ways to broaden the tax base, given the volatility of government revenues. According to the Mission's analysis, a broader and more stable revenue base would lower the amount of fiscal reserves needed to provide a sufficient buffer against economic shocks. It considers a low-rated and broad-based Goods and Services Tax to be an efficient way forward, given the ageing population. The resulting burden on low-income households could be alleviated through targeted compensation. The Government should also explore ways to stabilise investment income through arrangements with the Exchange Fund.
The Mission considers that Hong Kong's traditional strengths – flexible markets and strong institutions – have been key to its competitiveness.
In connection with flexible markets, it is important for the Government to strike a balance between labour market flexibility and worker protection. Given Hong Kong's monetary and fiscal institutional constraints, any minimum wage legislation would therefore have to be designed in such a way as to maintain the overall flexibility of the economy and its competitiveness.
As to strong institutions, the Mission welcomes progress made by the authorities on implementing Basel II, introducing the deposit insurance scheme, enforcing anti-money laundering and counter-terrorist financing guidelines, assessing potential sources of stress in equity markets and strengthening corporate governance.
The Financial Secretary, Mr Henry Tang said the Mission's positive assessment on the robust market infrastructure of Hong Kong was welcome. "Efficient and well-regulated financial intermediation is crucial to the competitiveness of an international financial centre. We will strive to maintain Hong Kong's success on this front."
The Mission is of the view that financial integration with the Mainland will be a major driver of Hong Kong's competitiveness. It commends the Government's efforts to co-ordinate with the Mainland authorities on ways Hong Kong's advanced financial infrastructure can be used to improve the Mainland's financial intermediation, thereby benefiting both economies. The proposal to issue renminbi denominated bonds in Hong Kong is a good example of such coordination.
The Chief Executive of the Hong Kong Monetary Authority, Mr Joseph Yam said: "We fully share the Mission's view that further financial integration with the Mainland is important to the maintenance of Hong Kong as an international financial centre. The key to this will be our ability to make it possible for Hong Kong's financial platform to play a role in meeting the needs of financial liberalisation on the Mainland and in channeling Mainland savings into Mainland investments."
The IMF Mission visited Hong Kong from October 16 to 24 this year for the 2006 Article IV Consultation on Hong Kong Special Administrative Region. It held discussions with the private sector, government officials and members of political parties.
The Mission's Concluding Statement of the Consultation is attached as annex.
Ends/Tuesday, November 7, 2006
Issued at HKT 13:09
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