Canadian research and investment advisory firm BCA Research noted that Hong Kong’s private non-financial companies topped a 32-country list by debt service ratio with potential for a «cataclysmic recession».
Hong Kong’s debt service ratio rose to 29.8 percent by March-end this year, topping the list by the Bank of International Settlements (BIS) and doubling the 16.5 percent level a decade ago, according to BCA Research.
At HK$10.9 trillion ($1.4 trillion) in the first quarter, total private non-financial firm debt reached the highest level since first began keeping records in 1999. This was equivalent to 322 percent of Hong Kong’s GDP in the same period, the second-highest ratio behind Luxembourg in a separate 43-country list by BIS.
«Cataclysmic Recession»
Credit risk rose sharply over the past three years and was driven almost entirely by a record-high debt serving costs which BCA Research believes could make the upcoming crisis more threatening than previous ones.
«Hong Kong’s private sector may perpetually leverage itself until debt service burdens reach some, as yet, unknown maximum level, eventually precipitating what would likely become a cataclysmic recession,» BCA Research said in a note.
U.S. Fed Buys Time
Although the Hong Kong dollar’s peg to the U.S. dollar will buy Hong Kong some time by importing the loose monetary policy to keep rates low, BCA Research believes that that lack of pressure to deleverage could prove even deadlier.
«This suggests that while the cyclical outlook for Hong Kong is either benign or positive, a negative (and potentially horrific) structural outlook is warranted barring a preventive policy response,» BCA said.
