The recent mission of the International Monetary Fund (IMF) gave a very positive assessment of Hong Kong's economic fundamentals and a firm and clear endorsement of the territory's economic policy framework.
The assessment was made in a Concluding Statement by an IMF Staff Mission (IMF Mission) following annual consultation discussions with Hong Kong.
The Financial Secretary, Mr. Donald Tsang, said, "We are pleased that the IMF has given us a clean bill of economic health. We have successfully demonstrated to the IMF that our sound economic fundamentals and effective economic policy framework have enabled us to ride the market turbulence with confidence."
"The IMF's endorsement of our linked exchange rate system further strengthens our commitment to maintain the system."
In its Concluding Statement, the IMF Mission noted that the underlying fundamentals of the Hong Kong economy are sound. This is underscored by its strong fiscal position, huge foreign exchange reserves and healthy balance of payments.
The IMF Mission projected a real Gross Domestic Product (GDP) growth of 5.25% to 5.5% this year, in line with the government forecast of 5.5%. The IMF noted that assessing prospects for 1998 is unusually difficult in light of the unsettled state of the financial markets, but projected growth to slow to 4.25% next year. This is not much below the Government's projected trend GDP growth rate over the medium term at 5% per annum.
The IMF Mission noted that the existing policy framework, including the linked exchange rate system, prudent fiscal policy, careful supervision of the financial sector and non-interventionist approach in factor markets, has proved to be effective and resilient in withstanding external pressures on the Hong Kong market. The IMF Mission said that continuation of this policy framework should reassure markets that the impact of recent events on Hong Kong will be relatively short lived.
The IMF Mission also commended the Hong Kong Monetary Authority (HKMA) for taking decisive action to allow a tightening of the monetary conditions and for successfully demonstrating its ability and commitment to defend the linked exchange rate system. "We were impressed by the successful demonstration of the ability of the authorities in recent events to defend the link. We strongly support continued steadfast adherence to this policy framework," said Mr David Goldsbrough, Senior Adviser who headed the IMF Mission.
Mr. Joseph Yam, the Chief Executive of the HKMA, said, "The visit by the IMF Mission is timely and important. I am glad that the IMF, having seen how our system was put to test and how we responded, has given a firm endorsement of the linked exchange rate system and top rating to our monetary management."
The IMF Mission recognized that allowing interest rates to rise in response to exchange market pressures was an essential element of the currency board mechanism which lies at the heart of Hong Kong's monetary arrangement. "Despite the short-term pain that high interest rates bring, a period of tighter monetary conditions is appropriate and desirable in cooling certain overheated sectors of the economy and enabling growth to be more sustainable in the longer term," said Mr. Goldsbrough.
The IMF Mission commended the authorities on their strong prudential and regulatory oversight of the financial sector. The IMF Mission said that conservative loan-to-value ratios and high levels of capital adequacy of the banking system in Hong Kong provided reassurances that it will be able to withstand the effects of the recent financial market volatility.
The IMF Mission strongly supported the authorities' commitment to prudent fiscal policies, including the commitment under the Basic Law to avoid fiscal deficits. The IMF Mission urged the continued adherence to the policy of significant fiscal surpluses in view of the recent turmoil, noting the importance of large fiscal reserves in instilling confidence in the authorities' policy framework.
The IMF Mission was in Hong Kong from 28 October to 5 November 1997. It held discussions with both the private sector and government officials. At the end of the visit, the IMF Mission issued the Concluding Statement, and on the basis of its finding, it will prepare a report that will be presented to the Executive Board of the IMF for consideration and endorsement.
Financial Services Bureau
7 November 1997
SEE ALSO :
Concluding Statement for the Article IV Consultation Discussions with the People's Republic of China in respect of the Hong Kong Special Administrative Region
