Statement by
President Tadao Chino
Asian Development Bank

at the ASEAN+3 Finance Ministers Meeting

"Economic Outlook for ASEAN+3"

15 May 2004
ICC Jeju, Republic of Korea

Introduction

Your Excellencies, Ladies and Gentlemen, it is once again a great pleasure and a privilege to be able to meet all of you for this ASEAN+3 Finance Ministers Meeting. I would like to express my thanks to our host, the Government of the Republic of Korea, for the excellent arrangements made for this meeting.

I will first brief you on ADB's assessment of the economic outlook for ASEAN+3. I will then highlight the importance of strengthening regional monetary and financial cooperation among the ASEAN+3 countries in building resilience to economic shocks-an area in which you have undertaken some important initiatives in recent years.

Economic Outlook for ASEAN+3

Last year saw significant economic fluctuations for most ASEAN+3 countries. In the first half of 2003, the weakening global economy, uncertainties surrounding the war in Iraq, and the outbreak of Severe Acute Respiratory Syndrome (SARS) contributed to a slowdown in GDP growth for many of these economies. Although signs of improvements were visible in early August last year when I briefed you in Manila, our assessment was one of cautious optimism. However, since then, the economic situation has taken a turn for the better. As a result, the ASEAN+3 countries, taken together, posted GDP growth of 4% in 2003-considerably better than the 2.4% growth foreseen earlier. Among the countries that performed better than expected were Thailand, Japan, PRC, and Malaysia, and to a lesser extent the Philippines, Indonesia, and Viet Nam. A number of developments in recent months suggest that the economic outlook for ASEAN+3 will continue to be very positive.

First, the external economic environment facing ASEAN+3 has vastly improved in recent months. There is increasing evidence that the US economic recovery is strengthening. There were concerns about the pace of job creation, but there are signs of improvement. US GDP is now forecast to grow by 4.6% this year, which is a full percentage point higher than that foreseen in August last year. Europe is lagging behind the US in the current recovery; yet, as I mentioned in the ASEAN Finance Ministers Meeting in April this year, there are tentative signs of an economic upturn. Most major European economies have emerged out of last year's recession, and the business confidence index for Germany-the largest European economy-has been on an upward trend for several months now. Overall, the current forecast of the euro area's GDP growth for this year, at close to 2%, is much higher than last year.

Second, within the region, Japan's economy is continuing to exceed expectations. Fourth quarter annualized GDP growth last year was a better-than-expected 6.4%, and GDP growth for 2003 reached 2.7%, much higher than the 0.9% forecast made at the time of our last meeting in August 2003. Moreover, the unemployment rate continues to fall, corporate bankruptcies are declining, and business sentiment and other forward-looking economic indicators point to continued economic vigor in the months ahead. GDP is now forecast to grow by 3% this year, about 2.4 percentage points higher than was foreseen in August last year.

Third, the recent buoyancy in intra-regional trade among ASEAN+3 countries is another factor that augurs well for the region's growth prospects. Intra-regional trade among ASEAN+3 countries now accounts for about 35% of the region's total exports, partly driven by the strong growth in the People's Republic of China (PRC).

Finally, within ASEAN+3, domestic demand remains strong in several countries, and this should continue to support growth. In Japan, while growth was driven primarily by exports in the initial phase of the current recovery, domestic demand is increasingly becoming a significant source of growth. Among other countries, domestic demand, especially fixed investment, is growing at an exceptionally high pace in the PRC, while in the last two years consumer spending accounted for about one third of the GDP growth in Indonesia and Malaysia, and more than half in the Philippines and Thailand. There are also tentative signs that private investment, after remaining subdued for some time, is starting to pick up in some of the crisis-affected countries, especially in Thailand.

Taking into account these positive developments at the regional and non-regional levels, the ASEAN+3 countries as a whole are forecast to grow by 4.3% this year. This is almost two percentage points higher than the forecast of 2.4% I presented in your August 2003 meeting. This reflects upward revisions in the 2004 growth forecasts mainly for Japan, Thailand, Singapore, Malaysia, PRC, Indonesia, and Republic of Korea. Growth forecasts for most other countries remain more or less unchanged from the August 2003 figures. With global growth moderating somewhat next year, due mainly to the US moving on to a slower and more sustainable growth path, ASEAN+3 is expected to register a lower, yet still robust growth of 3.2%. That said, let me add that given the emerging positive economic trends in Japan, an upward revision to next year's growth forecast cannot be ruled out.

Your Excellencies, needless to say, these forecasts are subject to risks, including the political uncertainties associated with this year's elections in several of your countries, worldwide geopolitical tensions and terrorism, and the large global current account imbalances.

There are also concerns that the recent increase in international commodity prices could ignite inflationary pressures, and this could choke the current recovery, both globally and within Asia. Yet, given the current low inflation environment and excess production capacities in several sectors in the region, it is unlikely to cause a major turnaround in inflation and harm the current growth trend.

The region should, however, be prepared to adjust to a possible increase in US interest rates, perhaps beginning sometime in the second half of this year. However, in the absence of broad-based inflationary pressures in the US economy, and with the persistent unemployment, the US interest rate hike is likely to be modest when it occurs. Moreover, for those ASEAN+3 countries that follow a flexible exchange rate policy, a US rate hike need not necessarily mean higher domestic interest rates. Even for those regional economies that have fixed exchange rates with the US dollar, domestic interest rates could be kept low, as many of these countries also hold sizable foreign exchange reserves. Overall, therefore, a possible US interest rate hike need not necessarily undermine continued strong growth among the ASEAN+3 countries.

Next Steps in Regional Monetary and Financial Cooperation

Your Excellencies, in your August 2003 meeting, I briefed you on the region's progress in financial and corporate sector reforms since the 1997 crisis, and some of the remaining challenges to be addressed. Today, I would like to focus on the challenges facing another set of initiatives that your governments have embarked on in recent years to enhance the region's resilience to future shocks-moves toward regional monetary and financial cooperation.

Before the 1997 financial crisis, regional cooperation among the ASEAN+3 countries largely focused on trade and investment. Since the crisis, this work has continued, but a new dimension-monetary and financial cooperation-has been added. ASEAN+3's regional monetary and financial cooperation initiatives fall into three broad categories: information exchange and policy dialogue, reserve sharing and pooling, and regional bond market development. In the area of information exchange and policy dialogue, the ASEAN+3 Informal Policy Dialogue Process, initiated by your Excellencies, is now well established. In the area of regional reserve sharing, we have the Chiang Mai Initiative (CMI). And in the sphere of bond market development, for the first time, concrete steps are being taken at the regional level under the Asian Bond Market Initiative. All these initiatives are historic and unprecedented, and I am very pleased that ADB is actively supporting many of them.

ASEAN+3 is now approaching a critical point with these initiatives. First, the 1997 crisis may be over; yet, in an increasingly integrated global economy, a new crisis may strike without much warning. Second, as guided by your Excellencies, the CMI is under review this year. The key issue is how the next steps under these regional initiatives should be sequenced, and at what speed they should proceed. In this regard, let me report to you the findings of a recently completed ADB study on Monetary and Financial Cooperation in East Asia, which were also discussed by your Deputies at a Senior Policy Seminar in Manila in mid-March.

Information exchange and policy dialogue constitute important stepping stones in any moves toward regional monetary and financial cooperation, as they allow countries to make more informed policy choices in an environment where financial contagion can often be regional. They also help to build mutual trust and allow the formulation of common positions across countries on important policy and development issues. Therefore, there is a strong case for further strengthening of the regional information exchange, economic monitoring, and the policy dialogue process.

One option is to institutionalize the process by establishing an independent, technical body-a regional policy dialogue unit-and a higher-level decision-making body, a regional surveillance group, over the next two years or so. The regional policy dialogue unit should function as an information resource on the state of the regional economies, and as an independent analyst of regional economic developments and policy issues. It should submit regular reports on macroeconomic and financial market conditions in participating countries to a regional surveillance group.

The CMI has proven a commendable initiative in the aftermath of the 1997 crisis. But this is relatively small compared to both the foreign exchange reserves held by member countries and the emergency assistance provided to these countries during the 1997 financial crisis. There is, therefore, merit in expanding the size of CMI swaps. CMI swaps are bilateral in nature. If we are to boost their effectiveness in preventing and managing crises, then the CMI needs to be multilateralized. Over the next few years, there is, therefore, a case for either seeking to enlarge the swap lines under the CMI and multilteralize the swap activation process, or consider earmarking a portion of the foreign exchange reserves for financing short-term liquidity needs of the member countries. Subsequently, say, over the three- to five-year horizon, the region could also consider establishing a centralized reserve pool.

Bond market development has long been an important issue for ADB's developing member countries. I am pleased to note that under your leadership, for the first time, concrete steps are being taken at the regional level. These initiatives should be vigorously pursued over the next several years, even as individual countries take national-level measures to develop domestic bond markets.

Conclusion

The brighter outlook for the region's economies presents an opportune time to consider and act upon many of these proposals I have just described. But I should caution that great care will have to be taken to ensure that regional-level efforts at monetary and financial cooperation are complementary, not competitive, with global and national level initiatives. As I have emphasized on earlier occasions, it is important to recognize that, ultimately, national initiatives are central to resilience building, with both regional and global initiatives playing a significant supportive role.

Let me conclude by assuring you once again that ADB stands ready to work in close partnership with your countries to address these challenges.

Thank you.