Hong Kong economy headwinds are underrated: UBS

Even with tightening cycle factor.

It has been noted that the headwinds for the Hong Kong economy, even if groups factor into a very gradual tightening cycle, are perhaps underestimated.

According to a research note from UBS, first, rates will be rising into a secular downturn.

Growth in HK has been weak and decoupled from the US in the current cycle, in contrast to the last rate hike episode during 2004-06 when growth in HK was robust and in sync with that of the US.

Here's more from UBS:

Second, rates will be rising at the peak of a credit cycle. Private sector debt, at over 200% of GDP today, is well above 1997's 150%. Given high debt stock, even a gradual uptick in interest rates will cause the debt service burden to increase meaningfully.

Growth is structurally weak in HK, reflecting a lack of a new growth engine; the secular slowdown in global growth, Chinese growth in particular; and extreme property price level at home, which are in our view starting to impinge on the domestic economy.

HK has decoupled from the US in the current cycle, in contrast to the last rate hike episode during 2004-2006 when growth in HK was robust (real GDP growth averaged 7.7%) and in sync with the US.

For our baseline, lending rates (mortgage rate in particular) are expected to increase a total of 200bps over the next two years.

The change in interest rates will drive debt service burden up to above 13% as a share of private consumption in 2016. This is 2.0 percentage points higher compared to the current level.