Speeches

Excellencies

Distinguished Guests

Ladies and Gentlemen

1. I am very happy to join you here today to deliver the opening address. The conference's focus on the Asian Financial Crisis is both timely and useful. We are all here, a decade later, hopefully better placed to distill the lessons learnt and to identify the potential challenges ahead.

BACKGROUND

2. Ten years ago, the Asian Financial Crisis threw regional markets and economies into turmoil. Many countries in Asia were affected, and Singapore was not spared either. For the Asian nations adversely affected by the crisis including Thailand, Korea, Indonesia, Malaysia and the Philippines - this came at a significant economic cost: in 1998, these countries saw their economies shrink by an average of almost 8%, coupled with heavy job losses.

3. Amidst this tough environment, Asian countries could well have taken the option to withdraw from globalization. Instead Asian policy-makers chose to maintain broadly open economies, while undertaking significant, and often painful, reforms to manage the challenges brought about by globalization. This has not only helped to speed up Asia's economic rebound, but also strengthened regional resilience against future financial shocks.

4. Today, Asia's economies are once again experiencing robust growth, at a rate much faster than the rest of the world. In 2006, Asia's combined GDP grew by over 5% - the strongest expansion pace in the ten years since the Asian Financial Crisis. Despite growth moderating in the US and Europe, expectations are that for this year, East Asian economies would post healthy, albeit moderating growth.

5. Asia's remarkable recovery is therefore a positive affirmation of the region's resilience, and underlying competitive strengths. Nevertheless, there are invaluable lessons to be learnt from Asia's experience, and several challenges lie ahead. Much has already been written about this topic and I am sure the distinguished speakers at this conference would be able to address many of these issues in greater depth. Let me just elaborate on a few key points.

IMPROVING GOVERNANCE AND TRANSPARENCY

6. One important lesson we have learned is the need to maintain high standards of institutional quality, governance and transparency of the financial system. These are critical prerequisites of establishing sound macroeconomic frameworks and building robust and stable financial sectors. This would in turn enable countries to reap the potential gains from financial globalization whilst mitigating the risks of capital volatility.

7. Towards this end, we have seen substantial improvements in terms of transparency of policies and availability of information in the region. For example, Asian countries now routinely publish information concerning their external debt positions. Regional central banks have also moved on to more clearly-defined monetary policy frameworks, and have undertaken to publish regular monetary policy statements.

8. There have also been material initiatives to reform financial sectors and improve corporate governance. These include overhauling regulatory and supervisory systems, raising accounting standards, and strengthening shareholder rights. Banking systems in the region have been rebuilt and recapitalized, and this has been reflected as a significant reduction in non-performing loans. For the ASEAN-5 countries, non-performing loans have fallen from 10.6% in 1997 to 4.6% in 2006^[1]. At the same time, Asian corporations have focused on capital management and substantially reduced their debt levels, with debt equity ratios sharply reduced across the board.

9. At the regional level, we have also seen a number of regional initiatives aimed at enhancing financial integration and resilience through increased policy dialogue and capital market development. Information exchange and policy conversations have been stepped up through various multilateral fora including the ASEAN and ASEAN+3 finance processes. These have helped to bolster a stronger sense of regional identity and cooperation. For example, the Chiang Mai Initiative was launched by the ASEAN+3 Finance Ministers in the wake of the Financial Crisis as a regional financing arrangement. Today, the network of bilateral swap agreements comprises some 17 agreements among eight countries^[2] worth an aggregate USD$75 billion. Discussions on multilateralising these arrangements are now ongoing.

BOND MARKET DEVELOPMENT

10. Given the inter-linkages between the balance sheets of the financial, corporate, government, and household sectors, another important lesson learnt is that disturbances in one sector can quickly spread to the others. It is therefore imperative that we strengthen the areas of weakness in the financial system. One such area that emerged was access to the debt market.

11. Before the crisis, most private borrowers in Asia did not have ready access to the debt market and relied primarily on bank loans. This reliance on bank financing resulted in over-concentration of credit risks within the banking sector.

12. Following the crisis, individual countries started to build more liquid and efficient local currency bond markets, and have seen their efforts bear fruit. As at 2006, the capitalization of Asian local bond markets was US$2.7 trillion, 4.5 times higher than that before the crisis. Back in 1997, only 15% of private sector financing was raised through the bond market. Now, it is almost a quarter. In addition to such developments, central banks and regulatory authorities have also put in place prudential measures guarding against concentration of risks by borrower or by sector. More recently, the development of securitization markets have created new channels to facilitate credit risk transfer.

13. Asian governments are also collaborating in the region to improve cross-border capital market activities. This culminated in the establishment of the Asian Bond Market Initiative (ABMI) under the ASEAN finance process and the Asian Bond Fund under EMEAP, or the Executives' Meeting of East Asia and Pacific Central Banks central bank process.

14. But much more work remains to be done. Asia's capital markets continue to be fragmented. This makes it difficult, inconvenient and costly for international investors to participate in our markets, which in turn prevents our capital markets from achieving even greater liquidity and efficiency. We are therefore working hard for greater harmonization of our markets, but this will take time, given the diversity in stages of development amongst Asia economies.

15. In the meantime, regional policy makers need to work closely with market participants to identify ways to further develop regional capital markets. This would involve establishing meaningful dialogue between the public and private sectors that would help in identifying key regulatory impediments, and developing ways to facilitate smoother movement of intra regional capital flows. Eventually, we want to promote easy access to regional liquidity pools, which would ultimately lower costs of funding for regional borrowers, and spur even greater economic activity.

CHALLENGES AHEAD

16. While we work towards our long term objectives, we must at the same time be mindful of key challenges and be ready to deal effectively with them.

Surges in Capital Flows

17. One challenge that many countries face is surges in capital flows. On the one hand, capital inflows into Asia reflect optimism on Asian growth and the diversification it offers. On the other hand, such large capital inflows, coupled with rising global financial market volatility, could pose monetary policy challenges. Surges in inflows can exert strong upward pressure on currencies, and potentially contribute to asset price bubbles. Conversely, policy makers would be watchful that capital outflows do not lead to a crisis of confidence in their currencies.

18. I believe this would be a continuing challenge that policy makers around the world would have to constantly manage. There is no quick and easy fix. Individual economies would have to focus on the basics to improve economic and financial fundamentals while working together to strengthen regional financial integration. Asian countries have in fact taken steps towards this direction. I believe these important steps would place us in a better position to mitigate risks posed by these challenges.

Increasing Competition

19. Another major challenge facing ASEAN in particular is growing competition from large emerging players such as China, India and the Middle East. China and India continue to draw a large share of foreign direct investment (FDI) into Asia. The figures show that, a decade on, FDI flow into Southeast Asia has not returned to its pre-crisis levels. In 1997, FDI in Southeast Asia totalled some US$34 billion; this declined to nearly US$20 billion in 2003^[3] . As a share of total world FDI, Southeast Asia's share fell from almost 8% in 1992-1997 to only 3% in 1999-2005. While pre-crisis levels of investment were regarded as excessive, the limited recovery is of great concern.

20. Given that 10 years have passed since the Financial Crisis; this phenomenon can no longer be attributed to transitional difficulties, such as the need for banks and corporations to restructure. One popular explanation offered is that China and India are diverting investment away from other Asian countries. Although the competition posed by China and India may be a factor, I believe it would be more productive to see how ASEAN can enhance its appeal and regain investor confidence.

21. One possible way is to create a more integrated ASEAN market, given that ASEAN's combined GDP is a non-trivial US$1 trillion, and sizeable when compared to India's US$890 billion and China's US$2.6 trillion. Indeed, ASEAN is moving ahead with closer and deeper economic integration to increase its attractiveness to investors. Realizing the importance of external linkages, we have established Free Trade Agreements (FTAs) and investment agreements with other countries and regions. In January this year at Cebu, ASEAN leaders agreed to bring forward the establishment of the ASEAN Economic Community (AEC) from 2020 to 2015, thus signaling commitment to greater economic integration. Leaders also agreed to transform ASEAN into a region with free movement of goods, services, investment, skilled labour, and freer flow of capital. These are positive steps in the right direction.

CONCLUSION

22. To conclude, I am confident that Asia will continue to make good progress in the reforms of its corporate and financial sectors. While there will always be challenges, there are also opportunities for Asia to push ahead in developing a vibrant and sophisticated financial sector. Regulators and market players must remain committed to banking reforms and seek to further broaden and deepen capital markets. With our concerted efforts, we can build a financial system that is resilient, efficient and innovative enough to help propel Asia onto the next lap of growth.

23. On that optimistic note, I wish you a fruitful discussion and a successful conference.

Thank you.

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^[1] Opening Address by MD(MAS) at the Merrill Lynch Pan-Asia Rising Stars Conference 9 May 2007, "Asia: Moving Up and Stepping Out".

^[2] China, Indonesia, Japan, Korea, Malaysia, the Philippines, Singapore and Thailand.

^[3] Business Times Article 12 June 2007, "Keeping FDI Flowing into ASEAN" by S. M. Thangavelu and Yong Yik Wei.