Hong Kong wide open to a financial crisis over the next three years

Worsening credit-to-GDP gaps are putting the city in danger territory.

Bloomberg reports that Hong Kong may have the most to fear as it ranks amongst the economies who are in greatest danger of a financial crisis or a sharp drop in domestic demand over the next three years, according to Nomura. 

Echoing the work of the Bank of International Settlements (BIS), Nomura took into account five gap measures to predict a financial crisis: private credit-to-GDP, private debt-service ratio, real effective exchange rate, real property prices and real equity prices.

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Countries in the highest danger of a massive plunge in demand are those who see at least 30 of signals flashing red and Hong Kong’s score is 52.

"This is higher than during the peak of the Asian crisis [1997-1998]," said Rob Subbaraman, chief Asia strategist for Nomura in a statement. 

China should also be on guard as it score clocks in at 33. Thailand, Colombia, and the Philippines are the closest to the negative threshold at 21, 20, and 19, respectively, according to Nomura. 

The Swiss-based BIS earlier warned against Hong Kong’s worsening credit-to-GDP gaps, which measures the risk associated to credit extended to households and businesses, which is in the red at 30.7 and long beyond the acceptable threshold at 9. Growth in the private-sector credit/GDP ratio has been more than 5pp above trend since 2010, and hitting 20pp above trend in 2017, according to credit rating agency Fitch. 

Hong Kong’s debt service ratio also falls at 6.9 which is similarly way beyond the acceptable range of 1.8.

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