The post-SARS economic recovery is taking place quite firmly in Hong Kong. But there are still structural issues to be addressed. The HKMA will strive to maintain a favourable monetary and banking environment, and stands ready to assist the Government for the stability and prosperity of Hong Kong.
In the past month or so we have seen significant improvements in economic and financial conditions in Hong Kong. The post-SARS economic recovery seems quite robust, helped by the influx of tourists from the Mainland. The dampening effect of SARS on the growth of external trade in goods, which had been quite rapid at the beginning of the year, seems pleasingly muted, although the fall in import and export orders during the SARS period has yet to be fully reflected in the trade numbers. There are anecdotal signs of a possible pick up in domestic consumption expenditure stepping into the third quarter. And there has concurrently been a noticeable change of mood in the community.
This general improvement in economic conditions is mirrored in the financial markets and is particularly obvious in the equity market, where both prices and turnover increased. In the banking market, while loan demand remained soft, the expected deterioration in asset quality, as SARS hit businesses and households, seemed mild, as low interest rates and a generally sympathetic banking sector continued to be helpful to those repairing their balance sheets. The increase in the number of negative equity mortgages, brought about by the fall in property prices over the SARS period, thankfully, has not been accompanied by any significant increases in the delinquency rate. The relatively small debt market in Hong Kong, however, remained quiet. There was, nevertheless, greater interest seen at the retail level, reflecting developmental efforts on the part of Government, both as a policy maker and as a borrower. But at a time when interest rates worldwide are seen to be reaching if not already at a trough, as evidenced by the significant rise in bond yields, investor interest in the debt market is understandably cautious. What seems remarkable is the ease with which the downward adjustment in bond prices elsewhere has been absorbed without any sign of systemic problems, although it may take time for the impact to become visible.
On the monetary front, it is particularly pleasing to see strengthened support, and enhanced confidence in the outlook, for the currency, as the forward premium in the exchange rate fell markedly to historically low levels. There has also been some inflow into the currency to take advantage of the rather more buoyant equity market, which provides further support. This is notwithstanding the continuing concerns over the budgetary situation and, consequently, the reported presence of the familiar hedge funds in the currency market. I welcome this calmness, but we must constantly remind ourselves of the need for serious efforts on fiscal consolidation on the one hand, and for vigilance towards the potent dynamics of international finance and their possible impact on monetary and financial stability on the other.
I certainly hope that these improvements in economic and financial conditions can be sustained. Hong Kong people have been superb in coping with the Asian financial turmoil, the burst of the domestic property bubble, the global adjustment to over-investment in information technology, structural adjustment arising from economic integration with the Mainland, and SARS. We all deserve a break and it does look like we are getting one. Let us try and make the best of it. But, in doing so, we should not harbour the thought that everything will be put right by the economic recovery. There are structural issues that have to be addressed and community support is important if structural adjustment in the long-term interest of Hong Kong is to be achieved. There is no doubt a need for fiscal consolidation. The scale of the problem was made worse by SARS and although the economic recovery, if sustained, will help, the budget deficit (measured as a percentage of GDP) is still a big one, even by international standards, not to mention the historical standards of Hong Kong.
We in the HKMA will do all that we can to sustain the favourable monetary and banking environment that is conducive to fiscal consolidation and to the resolution of other problems, not necessarily those of the public sector, but also of businesses and households. There is scope for the imaginative use of financial skills and we stand ready to assist in any way we can. One traditional role of the central bank or monetary authority is to be financial advisor to government and we look forward to contributing further to the stability and prosperity of Hong Kong appropriately.
Joseph Yam
11 September 2003
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