Lower investments loom as private debt swells 228.7% of GDP in Q3

The weakness of the HKD may prompt corporates to debt servicing instead.

The protracted weakness of the local currency against the greenback heralds more bad news for Hong Kong’s business sector as corporates may cut back on their investments amidst swelling private debt levels, according to BMI Research.

The city’s non-financial corporate debt as a proportion of GDP rose by another 107.7pp to 228.7% in Q3, according to data from the Bank for International Settlements.

The widening interest rate differentials of Hong Kong and US also continue to widen, prompting the Hong Kong Monetary Authority (HKMA) to reduce liquidity in the banking system and push interbank lending rates up. 

“We should not expect that the ultra-low interest rate environment will continue unabated. We must carefully consider whether it is possible to cope with the increase in interest expense on loans, and we must also pay attention to the increase in interest rates to asset prices,” Financial Secretary Paul Chan noted in a blog post.

Also read: Hong Kong banks lift time-deposit rates amidst expected rate hikes

Businesses could therefore opt to cut back on their investments and diver their resources to debt servicing, which could weigh in on the city’s economic growth prospects. 

“Hong Kong corporates are therefore highly exposed to risks stemming from rising interest rates that are tied to the US Federal Reserve’s monetary policy, and escalating trade tensions between China and the US,” said BMI.

If this ever comes into fruition, BMI notes that Hong Kong’s commercial banking sector remains well-capitalised to withstand deterioration in asset quality as total capital adequacy ratio clocked in at 19.1% in December.