Hong Kong’s economy has made a strong recovery in the months since it reopened its borders, the International Monetary Fund (IMF) has said, but warned a return to form could be derailed by problems such as rising interest rates, regional conflicts and a global slowdown.

The agency on Friday also praised the resilience of the city’s financial system, including the Hong Kong-US dollar peg, after officials visited the city.

“Strong fiscal policy support has helped the economy navigate through multiple shocks over the last few years, while strong institutional frameworks and financial buffers have allowed the financial system to remain resilient and continue to operate smoothly,” it said.

The IMF earlier lowered its forecast for Hong Kong’s economic growth this year to 3.5 per cent, 0.4 percentage points lower than its prediction last October.

But it also said growth was expected to hit 3.1 per cent next year, up 0.1 percentage points on the previous forecast.

After four quarters of contraction in a row, the local economy rebounded with 2.7 per cent year-on-year growth in the first quarter of 2023 because of increased tourism and higher domestic consumption.

But the IMF also warned that the city’s economic difficulties had broadened to the local labour market, which has worsened in recent years.

Government figures showed the workforce shrank by 94,000 people last year, its biggest drop in almost four decades.

The international body added that a “further adjustment” in the property market still posed a risk to the economy because of rising mortgage rates. It said boosting the housing supply was “critical to resolving the structural supply-demand imbalance”.

Residential property prices fell by 16 per cent between September 2021 and the end of 2022, before rebounding early this year, it noted.

The IMF said the free flow of capital would need to continue in the long term to underpin the city’s competitiveness as an international financial centre.

“The authorities should continue to preserve the rule of law and the common law system, enhance high-quality financial regulation and supervision and attract talent to provide world-class financial and other related professional services,” it said.

Tourists take in the sights at Tsim Sha Tsui.

It also warned that a global growth slowdown, the escalation of regional conflicts and the resulting disruptions to trade could affect the city’s recovering economy.

Hong Kong’s Financial Secretary Paul Chan Mo-po welcomed the IMF assessment, which he said recognised the strong momentum of the city’s economic recovery and the government’s good fiscal policy and regulatory regime.

Chan, speaking at a forum, highlighted the importance of global collaboration as the world’s economy was affected by persistent high inflation, risks of an economic hard landing and interest rate rises.

“As China is opening up its market further, Hong Kong can play a facilitator role in capital flow, talent and logistics,” he said.

Hong Kong Monetary Authority CEO Eddie Yue Wai-man said the dollar peg was an anchor of the city’s economic and financial stability, which was also supported by ample foreign reserves, prudent fiscal frameworks, a regulatory regime and economic flexibility.

The authority revealed on Thursday that the city’s foreign currency reserves stood at US$427.4 billion (HK$3,743 billion) at the end of April, or five times the currency in circulation in Hong Kong.

The figure, however, was US$3.4 billion lower than the US$430.8 billion recorded at the end of March.

Alicia Garcia Herrero, the chief economist for Asia-Pacific at French investment bank Natixis, agreed Hong Kong had enjoyed a lot of wins since fully reopening its border with mainland China, as evidenced by a return to growth in the first quarter. But she questioned how long the Hong Kong dollar peg would last.

“I’m not suggesting it’s immediate, but the point is it’s obviously something that in the medium term will have to be rethought, because Hong Kong’s business cycle is so dependent on the mainland,” she said.

Billy Mak Sui-choi, an associate professor in Baptist University’s department of accountancy, economics and finance, said the government’s reserves could last 18 months, and the city’s fiscal policies and stable financial market would help to weather a global economic slowdown.

Mak said the IMF’s suggestion that the government scrap special stamp duty measures when speculative demand waned warranted careful consideration.

“If the government lifted the special stamp duty measures, then the market might go back to the upwards trend, which will affect the first-time buyer’s ability to acquire homes,” he said.

He added the city should accumulate financial reserves to help counter any potential economic downturn.

The government put the city’s fiscal reserves at about HK$817 billion for the 2022-23 financial year. But the amount would shrink to around HK$763 billion this financial year because of increased expenditure, it said.

The economy was brought to a standstill in the same period last year because of the fifth wave outbreak of Covid-19.

Chief Executive John Lee Ka-chiu on Tuesday said a number of large-scale promotions by the government had stimulated tourism and consumption and given the economy a boost.

The city unveiled the “Hello Hong Kong” campaign in February to lure back tourists with spending vouchers, special events and a giveaway of 700,000 airline tickets.

The HK$20 million “Happy Hong Kong” campaign kicked off last Saturday, with discounted film tickets on offer for the day and free food fair passes distributed to the public earlier in the week.