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Asian Financial and Economic Crisis: Recovery and Regional Response

Opening Address by
Dr. Bindu N. Lohani
Vice President, Finance and Administration
Asian Development Bank

At the Second Regional Forum on Financial Asset and Liability and Risk Management

29 July 2009
Mariott Hotel, Singapore

Distinguished participants, speakers and colleagues, we are all well aware of how seriously the events of the past year have not only shaken the US financial system but had serious repercussions for global finance. We are witnessing a sea change in the world’s financial architecture – one in which the public sector is taking on, at least for the moment, a much greater role.

The global economy appears to be transiting from recession to recovery subsequent to a most severe financial and economic crisis. Along with the coordinated fiscal and monetary policy actions, a comprehensive re-examination of the financial regulatory and supervisory framework is also underway around the world. A review of the policies relating to financial regulation, in a way, needs to address both the acute policy dilemmas in the short run and a fundamental re-think on broader frameworks of financial and economic policies over the medium-term.

We can say that Asia had learned the lessons from the 1997/98 Asian financial crisis. Asian leaders reformed banking and financial sectors regulation, ensuring financial institutions remain sound with capital adequacy ratios well above international norms. They worked hard to develop financial systems beyond bank financing into, for example, government and corporate bonds, thereby improving financial resilience. In addition, savings accumulated from years of export-driven growth gave the region a comfortable cushion in the form of the large international reserves. It is remarkable that 46% of the world's total foreign exchange reserves are held in Asia. This implies that while external funding in US dollars, for example, was constrained, most banking systems within the region maintained sufficient liquidity and were able to provide credit for real economic activity.

Financial markets and currencies continue to stabilize throughout the region. This is a crucial difference from the situation a decade ago during the Asian financial crisis. Although access to credit has been tightened for riskier borrowers, relative financial health has allowed the region's banks to continue to provide credit to the private sector without major disruptions. Growth in bank lending, while off from last year's peaks, remains healthy. Here in Singapore, lending was up 9% in April year-on-year. In Indonesia, it was up nearly 22%; the Philippines 19%; and in Korea and Malaysia lending was up 12%. These relatively favorable credit conditions are indeed encouraging.

Yet many economies in Asia are either in recession or face significant growth slowdowns. Overall economic growth in the region dropped sharply in the first quarter of 2009, but early indicators suggest that the pace of decline has slowed during the second quarter. The crisis was transmitted to Asia through financial markets and trade channels. A sudden and precipitous drop in external demand has hurt the region's exporters and a sharp deterioration in consumer and business sentiment has also affected economies with large domestic demand that have grown rapidly in recent years.

Slower economic activity threatens to significantly increase poverty throughout the region, at least until growth engines are restarted. The slowdown is impacting people's lives, especially the poor. Instead of breaking out of poverty, we expect that more than 60 million people in developing Asia-including 14 million in China and 24 million in India-will remain below the $1.25 a day absolute poverty line in 2009 as a result of the global recession. These people would have been freed from the shackles of poverty had economic growth continued at pre-crisis levels.

In Asia, the impacts of the crisis have been felt in both the social and economic spheres, and Governments and other institutions need to take steps to address social problems stemming from the global downturn. A three percentage point drop in Asia's growth rate in 2009 translates to 10 million more undernourished people; 56,000 more deaths of children under five years of age; 2,000 more mothers dying at childbirth. Unemployment has risen, especially in the cities, contributing to a rise in poverty levels. Remittance growth has slowed and could fall even more if overseas jobs evaporate (in firstt quarter 2009, overseas jobs for Bangladeshis fell 38%).

Economic growth in developing Asia was already beginning to cool last year from the record 2007 level of 9.5%. It fell three full percentage points to about 6.3% in 2008. And we expect it to fall another three percentage points this year to an estimated 3.4%, the region's slowest growth since the 1997/98 financial crisis. Thanks in part to the prompt policy responses by the region's policymakers, we could see a V-shaped recovery and the region’s growth could rebound to 6.0% in 2010. However, given the tentative nature of the expected recovery, it is critical that authorities stay the course in supporting domestic demand and growth. Monetary and fiscal policies in the region need to remain accommodative until the recovery gains substantial traction. It is also important that the region looks beyond the crisis and focuses on longer-term issues related to financial regulatory reform.

The pronounced impact of the global downturn on developing Asia’s growth underlines the risks of excessive dependence on external demand. Developing Asia should rebalance its growth, putting more focus on domestic consumption and demand, in order to boost its resilience to large external shocks in the long run. Ensuring that fiscal stimulus packages are implemented effectively and efficiently is key to strengthening domestic demand in the face of continued weak global demand. We have already seen positive impacts of its stimulus package on China.

Here in Singapore, the economy showed signs of recovery in the second quarter. Gross domestic product grew an annualized, seasonally adjusted 20.4% in the April-June period from the previous quarter. We note that the Government of Singapore has established the Economic Strategic Committee to identify future growth opportunities and to devise a strategic plan. Indeed, we note the many proactive steps taken in the right direction.

Let me now mention some of the regional response that is taking shape. As the crisis evolves, it becomes increasingly clear that in forging policy, the whole is greater than the sum of its parts. Common economic interests supersede differences between governments. The trend toward regional cooperation in Asia, particularly East Asia, is growing. And, as it did in the aftermath of the 1997/98 financial crises, the process accelerates during a downturn.

Closer cooperation within ASEAN+3, for example, can be seen in the recent expansion of the multilateralized Chiang Mai Initiative, the reserve pooling arrangement that can provide emergency liquidity for members in need. As part of the agreement, ASEAN+3 will establish a permanent independent surveillance unit to promote objective economic monitoring and operationalize the $120 billion reserve pool by the end of the year and could eventually pave the way toward greater regional cooperation for financial stability.

ADB is also working with ASEAN+3 to accelerate establishment of a credit guarantee and investment mechanism, or CGIM. The CGIM will provide credit guarantees for domestic bonds to meet financing needs and will help develop the region's localcurrency bond markets. This is important to provide an additional avenue for channeling Asian savings effectively and efficiently into Asian investment. It is part of the roadmap outlined by the Asian Bond Markets Initiative, another long-term ASEAN+3 program.

There is also a need for more effective communication, if not coordination, on exchange rate policies. While most Asian currencies tumbled during the height of the financial crisis, in recent months, several currencies in the region appreciated against the US dollar as investors' risk appetite began to return. Heightened foreign exchange volatility can undermine Asia's banking and corporate sectors-especially where currency hedging remains difficult. While we all understand how sensitive this is, helping stabilize currency movements between trading partners in our region can further accelerate intraregional trade and investment flows.

Harmonized and coordinated national, regional and global responses are extremely important, particularly at a time of global financial turmoil and the generally accepted need for some major regulatory reform worldwide. For example, harmonizing prudential criteria and accounting standards, strengthening governance and transparency, and coordinating national regulatory and supervisory efforts will help ensure market integrity, build consumer and investor confidence in the region's financial systems and safeguard financial stability. This is one reason why the Asian Development Bank (ADB) has been promoting the establishment of an Asian Financial Stability Dialogue - among finance ministers, central bank governors, regulators, supervisors and private sector representatives - to effectively and harmoniously coordinate responses to financial crisis and promote financial stability in general. Such an arrangement that coordinates national and regional initiatives will also allow Asia to articulate a stronger voice at global forums. Reform of global financial architecture is underway. Emerging Asian economies must take ownership of this new architecture reflecting its economic strength and actively participate at all levels of governance. The region’s economies also need to reinforce efforts for effective regional cooperation, while actively participating in global forums such as Financial Stability Board and the Bank for International Settlements. And creation of the Asian Financial Stability Dialogue is one such arrangement to ensure that the new financial architecture not only meets the challenges of globalized finance but also serves the region’s financial development agenda.

Let me touch briefly on what ADB is doing in response to the current economic crisis.

As an immediate response to the global economic crisis, we have committed an additional $10 billion to supplement our assistance over 2009 and 2010 to member countries in need of extra support. This will help us ramp up our assistance to $32 billion over 2009 and 2010 from the $22 billion during the 2007-2008 period. Up to $1 billion of this funding will support trade financing and is expected to generate up to $15 billion in much-needed trade assistance by the end of 2013. An expanded trade finance program is critical to fill the gaps left by a weak international financial sector, to build public-private partnerships and to promote regional integration. Our Asian Infrastructure Financing Initiative will dedicate productive investments to infrastructure, which is critical for longterm growth.

We have also established a fast-disbursing $3 billion Countercyclical Support Facility to meet urgent needs stemming from the crisis. The facility will support the expansion of domestic demand and production, strengthen social protection, and facilitate trade to protect against job losses in the region. In low-income countries, we are providing $3.4 billion this year by front-loading our available concessionary Asian Development Fund resources. We hope these efforts will help governments maintain or even increase public expenditure programs for financing education, health services, and public safety nets, especially for poor and vulnerable.

Ladies and gentleman, there is no doubt that financial institutions face unique challenges in the area of ALM and risk management. The role of ALM and risk management has become increasingly critical in the successful implementation of our institutions’ missions. This Second Regional Forum, therefore, provides an opportunity for practitioners from a wide range of countries to share insights on asset and liability and risk management—both in working through the current crisis and in building capacity for the future.

Over the next few days you will hear from some of the world’s experienced financial institutions, rating agencies and consultants. Themes will include management of interest rate and currency risks, liquidity planning and capital adequacy management. The topics of discussion will also include the credit risk management, fund transfer pricing, balance sheet management and hedging techniques. On the last day of the forum, ADB will share with you some of our products and undertakings in these areas.

I hope that you will take keen interest in sharing your thoughts and ideas and will take away important concepts and lessons which will help strengthen your bank’s balance sheets. The sharing of ideas need not stop here in this Forum. I encourage you to continue to network and use the web site discussion forum that will be launched on the third day to stay connected.

In closing, let me say that we are especially appreciative of your participation in this Forum in light of the troubled times. We are gathering at a historic moment with unprecedented turbulence in the global financial system and a tightening of private credit to many of the countries here in attendance today.

I would also like to convey my appreciation to our speakers from the Development Bank of Singapore, Hongkong Shanghai Bank, KPMG, Price Waterhouse, PIMCO, Planters Development Bank, Philippines, Standard & Poor’s, and Standard Chartered Bank for sharing their expertise. And I thank staff in the ADB’s Treasury Department for their hard work in close coordination with other departments of ADB including Private Sector Operations Department, the Office of Cofinancing and the Risk Management Unit, in organizing this event. During the sessions, we will draw on everyone’s expertise, and both international and local knowledge, to build on our substantial ALM and risk management experience. I wish you all a fruitful and productive forum!

Thank you.