HONG KONG - HONG KONG'S economy is 'highly exposed' to the crisis in global financial markets and is headed for a marked slowdown, the International Monetary Fund said in a report released on Tuesday.

However, the Asian financial hub has made welcome moves to try to mitigate the effect of the global slowdown and its finances were in a solid position, the IMF said in a report on the territory's economy.

'As one of the most open economies in the world and with its focus on financial and trade services, Hong Kong... is highly exposed to the unfolding crisis in international financial markets and to the slowdown in the global economy,' the IMF's review of the city's economy during 2008 said.

'There are now clear signs of economic deceleration.' 'Following several years of impressive economic performance marked by robust growth and rising disposable incomes, the Hong Kong economy is headed for a marked slowdown,' it added.

Despite the challenges, the report said contingency planning in recent years and a large fiscal surplus would help the city battle the fallout from the global slowdown.

The IMF welcomed government measures to stimulate domestic demand and preserve liquidity in the troubled financial sector.

It added the city should retain the peg between the Hong Kong and United States dollars, continue with planned infrastructure projects and encourage greater co-operation with mainland China.

However, it warned that the city's worsening pollution provided a threat to the city's future growth prospects.

The IMF warning comes after Hong Kong chief executive Donald Tsang on Monday said the city, which is already technically in recession, faced a further slowdown in 2009, but insisted it remained in a strong position.

Mr Tsang also unveiled additional government measures to stimulate the economy, including boosting a loan scheme for small and medium-sized businesses to 100 billion Hong Kong dollars (S$19.33 billion).