Hong Kong needs continued fiscal stimulus in the upcoming budget to combat the economic slowdown, the International Monetary Fund (IMF) said.

In its staff report on Hong Kong released yesterday, the IMF said Hong Kong's economic growth will slow down to 2 percent in 2009 from an estimated 3.7 percent this year and 6.4 percent in 2007.

"Directors (of IMF) encouraged the authorities to take a more medium-term perspective in setting fiscal policy, favoring a move away from the one-off measures of recent years," the report said.

IMF notes that the well-targeted infrastructure investments should boost the economy by further increasing skill levels and productivity.

The SAR government will announce the budget for 2009-10 on Feb 25.

IMF said that Hong Kong is highly exposed to the unfolding crisis in the global financial markets and to the slowdown in the global economy.

To cope with the impact of the global financial tsunami, the SAR government has taken various steps in recent months to bolster the economy.

Early this week, Chief Executive Donald Tsang announced that the government will provide up to HK$100 billion of loan guarantees to help businesses, while pledging to create more than 60,000 jobs next year by speeding up infrastructure spending.

The IMF commended the actions taken by the authorities. "In particular, directors welcomed the authorities' implementation of a range of measures to stimulate domestic demand through a sizable fiscal stimulus package, and to preserve stability by providing liquidity and sustaining confidence in financial markets," the IMF said.

Financial Secretary John Tsang welcomed the IMF's commendations. "We will continue to implement necessary measures to help those in need during this difficult period."

The Hong Kong SAR economy is heading for a marked slowdown reflecting the crisis hurting international financial markets and the global economic downturn, IMF said.

IMF directors considered a possible worsening of international financial market turbulence as the key risk for the Hong Kong SAR over the short term.

The IMF also maintains its long-standing support of the Linked Exchange Rate System, as the Hong Kong dollar continues to be valued broadly in line with economic fundamentals.

The IMF has commended the actions taken by the Hong Kong Monetary Authority (HKMA) as well.

"Directors were reassured by the resilience of the Hong Kong SAR's banking system to date," the report said, "but cautioned that credit growth could slow sharply and credit quality could deteriorate alongside the economic downturn."

Joseph Yam, chief executive of the HKMA, said: "We will keep a close eye on global market developments and are prepared to take any further necessary measures to safeguard the stability of the system."

(HK Edition 12/10/2008 page2)