Hong Kong’s service sector will be the part of economy that sees “the biggest rebound” as borders reopen, UBP told CNBC’s “Squawk Box Asia” on Thursday.
However, it warned that the sector is coming “from a very fragile situation,” given its contraction in every quarter of 2022.
“We can’t exclude the possibility of further insolvencies or bankruptcies … even as things do look to improve in the months ahead,” said Carlos Casanova, UBP’s senior economist for Asia.
The latest figures from the Hong Kong government also showed the city’s economy contracted by 4.2% in its fourth quarter, the fourth-straight quarter of declines. Real GDP also shrank by 3.5% year-on-year.
“That contraction was much faster than we had anticipated, our forecast was -2.8%,” Casanova added.
However, the economist was optimistic that Hong Kong’s economy should be “in a position to return to expansion” in 2023.
“We are seeing signs that there’s been a sequential acceleration in January. So that’s the good news,” said Casanova.
Factors contributing to possible expansion
Besides the return of mainland Chinese tourists, Casanova said “more supportive equity valuations” will help improve sentiment in Hong Kong.
“You also have this expectation that the Fed will hike rates at a more modest pace in 2023 … that at some point you will have a pause,” he explained.
“And that means that this pro-cyclical headwind that we’ve been experiencing in Hong Kong with tighter monetary policy … will not be such a big drag in the year ahead.”
On Wednesday, the Federal Reserve raised its benchmark interest rate by 25 basis points, or a quarter percentage point — while indicating there will be “ongoing increases in the target range.”
Hong Kong, whose central bank moves in lock-step with the Fed, raised its base rate by 25 basis points to 5% on Thursday.
Boost for housing demand
Hong Kong’s property sector also experienced “subdued sentiment” last year and, like the services sector, is “definitely in a perilous situation as well,” said Casanova.
For example, home prices plunged to a five-year low in October as interest rates pushed up borrowing costs.
“In fact, data on the housing sector earlier this week showed that the number of mortgages that are underwater … is at the highest in 18 years,” Casanova said.
“But it only takes a very small number of mainland talent to move into Hong Kong in order to at least put a floor on that correction in housing prices.”
Reversing the number of mortgages that are in negative equity will be “a very important side-effect” from the reopening of borders and recovery of domestic demand, he added.