Asian Regional Public Debt Management Forum
Opening Remarks by
Bindu Lohani
Vice President, Finance and Administration
Asian Development Bank
3 November 2009
Kuala Lumpur, Malaysia
Ladies and Gentlemen
On behalf of the Asian Development Bank, I would like to extend a very warm welcome to you all to our inaugural Asian Regional Public Debt Management Forum, kindly co hosted by Bank Negara Malaysia. ADB very much appreciates you taking time out of your busy schedules to attend and participate in this Forum. I realise that for many of you, this is a very busy time with significantly increased borrowing requirements brought about by the global effects of the financial crisis. We do appreciate your participation and hope that you will benefit from the many speakers and discussion sessions and, the opportunity to network with your fellow debt managers. ADB is keen to assist in developing the Forum into a regular event on the Asia-Pacific debt managers' calendar and we hope that the forum would provide ongoing benefits to you in the future.
Global Economic Crisis
It is timely that we hold the Forum at this time. Over the past year we have seen the global economic crises unfold and the impact it has had on the fiscal balance of many countries. It has also highlighted the failure to correctly assess risks particularly in a world with substantial financial innovation, and the need to provide adequate corporate governance and oversight of financial institutions and corporations.
It is important to note, first, that the developing economies across Asia, which we refer to as "developing Asia", were rather lucky in some ways. Its financial systems had limited direct exposure to the types of assets that characterized the latest financial meltdown in Wall Street and on the European continent. Although financial spillovers to Asia were indeed significant, the most severe have been limited to economies where financial markets are highly open and with strong financial linkages to the outside world.
According our recent Asian Development Outlook, various financial indicators and banking sector data support the view that Asia's financial systems were well prepared for the crisis: nonperforming loans were quite low as a share of total loans; banks were well capitalized, and reliance on credit lines to western banks was minimal. Nonetheless, stock prices in Asia were closely linked to global markets and suffered badly in 2008.
Overall, it seems 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.
However, the main channels by which the financial crisis and subsequent global slump spread to Asia were in the real economy—chiefly the collapse of demand for Asian exports in major global markets. 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.
This global economic crisis exposed developing Asia's over-reliance on extra-regional markets for both exports and capital flows. The region must hasten efforts to increase internal trade and stimulate domestic consumption as key growth drivers. While Asia is rebounding from the crisis faster than other regions, it was unlikely for it to return to sustained strong growth unless key drivers are "rebalanced" to give more weight to domestic stimulants. Otherwise, economic growth will not be strong and long enough to make a dent on the large number of poor in the region.
It was noted that economic growth in developing Asia was already beginning to cool last year from the record 2007 level of 9.5%. However, it fell three full percentage points to about 6.1% in 2008. And we expect it to fall another three percentage points this year to an estimated 3.9%, the region's slowest growth since the 1997/98 financial crisis. Thanks in part to the prompt policy responses by the region's policymakers, the region's growth could rebound to 6.4% in 2010.
However, we still see some downside risks which may come from a protracted global slowdown and which could delay the region's full recovery. So, even though we are now leading the recovery, there is no room for complacency because global recovery seems to be weak in the near term.
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 and infrastructure enhancement.
ADB's Response to the Global Economic Crisis
ADB acted promptly and decisively to meet the needs of its developing member countries or DMCs affected by the global economic crisis. ADB remains focused on its areas of comparative strength, knowledge, and experience. ADB's crisis-related assistance will largely continue in the core operational areas under its long-term strategic framework 2008-2020.
ADB's crisis-related lending is expected to increase by more than US$10 billion in 2009-2010, bringing total ADB assistance for these two years to about US$32 billion. The increase in lending comprises US$1 billion for trade finance, US$3 billion for the Countercyclical Support Facility and about US$6 billion to extend loans such as those for infrastructure investment. ADB will also expand its crisis-related support through grants for policy analysis and capacity building. Let me explain a little more about the Facility.
ADB established the Countercyclical Support Facility to provide short-term, fast-disbursing loans to support DMCs supplement their fiscal spending to counter the crisis, amidst tight global credit conditions and sharp increase in funding costs. Given severe resource constraints faced by low-income countries, ADB approved an additional liquidity of US$400 million to ADF-only countries with unanimous support from the ADF donors. ADF borrowers are also allowed to front-load their entire 2009-2010 biennial allocation.
In addition to these initiatives, ADB is adopting a flexible approach for loans programmed before the crisis by making adjustments to better match the current financial and economic needs of each borrowing country. Over and above its funding support, ADB is providing non-lending assistance for policy dialogue, policy advice for government officials at the country level, sub-regional and economic analysis and forecasts for the Asia and Pacific region.
Finally, ADB is also working closely with the ASEAN+3 countries to multilateralize the Chiang Mai initiative, and establish 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 local currency 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.
Public Debt Management
The global economic crisis does highlight the importance of public debt management, and the debt managers' abilities to develop domestic bond markets and the investor base to meet increased government financing requirements. In addition, debt managers are also increasingly becoming involved in risk management across the whole of government that incorporate explicit and implicit contingent liabilities. Debt managers and DMOs can now provide a very important contribution in setting and implementing the governments' overall fiscal strategy.
The large borrowing programs that government debt managers are undertaking at present are unheralded since the late 1970s and early 1980s. What is different now is that many governments have developed their domestic market for government securities to the extent that much of the current financing requirement will be met initially from domestic markets. Debt managers complement by tapping international markets when market opportunities arise and pricing is favorable. We have witnessed very successful international bonds issues recently by some of the regional sovereigns.
Public debt management developed as an important component of government financial management following the debt accumulation in the 1970s and 80s when governments began to assign specialized and dedicated resources through the establishment of a debt management office or DMO. While OECD countries were the first to establish such DMOs, we have seen emerging market economies establish successful DMOs over the past 10 years, including here in Asia.
The publication of the Guidelines for Public Debt Management by the IMF and World Bank in 2001 and updated in 2003 set out the principles for sound practice public debt management. The practical application of these principles is continuing to evolve as DMOs develop methodologies and tools to manage their public debt portfolios. This normally starts with simple risk measures and debt sustainability analysis or DSA. More recently, two additional debt management tools have been introduced. Firstly, a medium-term debt management strategy or MTDS has enabled debt managers to more accurately assess the costs and risks of the government's debt portfolio. Secondly, debt management performance assessment or DeMPA is a useful tool to assess how well governments are managing the full range of public debt management operations. During the next two days, you will learn more about key features of these tools and experience sharing from selected countries.
The ADB has been assisting various developing member countries to strengthen knowledge and skills associated with public debt management. The advisory services provided to middle income countries involve establishing legal, administrative, and institutional frameworks, enabling efficient management of external debt portfolios, and linking external debt strategies with macroeconomic policies.
In our lower income member countries, our assistance has emphasized enhancing countries' capabilities to record, monitor, and analyze their external debt portfolios using best-practice information technology solutions. One of our most recent initiatives, where we partner with the IMF and the World Bank, is to provide trainings on debt sustainability analyses. Some of you or your colleagues may have participated in the workshop conducted two weeks ago in Manila.
Asian Regional Public Debt Management Forum
The ADB has noticed that many of the better performing DMOs in emerging market countries have benefited from significant and ongoing assistance from the international community. Yet, there is no forum designed specifically for the Asia-Pacific debt managers to exchange views and experiences.
It is in this context that the ADB decided to fill this gap by facilitating a regional forum to provide debt managers across Asia-Pacific such an event. The objective is to provide a venue where government debt managers can meet and present public debt management practices from across the region, share experiences and develop a regional network.
You will note that the Forum agenda focuses on the financing needs of governments, including accessing international capital markets, developing the domestic market for government securities, recent innovation in financing instruments such as Islamic bonds, and investors' perspectives on Asian sovereign credits. The agenda also covers many of the existing analytical frameworks.
This is the ADB's first cross-regional public debt management forum and my colleagues have sought your feedback on your preferred topics and frequency for future event. The consolidated feedbacks will be discussed with all of you on Thursday to determine the next forum plan.
As I mentioned at the outset, the ADB is very appreciative of Bank Negara Malaysia for co-hosting this inaugural event. I personally would like to thank the Governor and all the staff involved in the preparation and hosting arrangements for the Forum. I would also like to convey my appreciation to all of our speakers from governments, MDBs, investment banks, fund managers, rating agencies, the Commonwealth Secretariat and UNCTAD for sharing their expertise.
You could see from the agenda that we have a full program over the next 2½ days and we have assembled very high quality and experienced debt management practitioners to speak and facilitate discussions. My colleagues will look forward to meeting up with you all and getting your feedback on how the ADB can best assist in enhancing your public debt management operations going forward. I hope that you will have a productive time while here in Kuala Lumpur and benefit from the Forum discussions.
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