Speech by Haruhiko Kuroda, ADB President, at the 13th ASEAN Finance Ministers' Meeting, Pattaya, Thailand
I. Introduction-Impact of the global crisis on ASEAN
Your Excellencies, ladies, and gentlemen:
It is an honor to be with you once again to discuss what is surely paramount on everyone's mind. In light of last week's landmark G20 summit, what can we expect, and what are the risks, as the global recession firmly plants itself on Asia's shores? What can ASEAN do to ensure the crisis does not disrupt its traditional steady growth path? And what can we at ADB do to support it?
It is clear that the process of de-leveraging continues to hit ASEAN's financial assets and currencies. Although global financial markets have begun to show some signs of stabilizing, this stability is tenuous pending results of the initiatives to clean up balance sheets and ensure resumption of normal credit. Credit conditions in ASEAN are not as tight as in North America or Europe, but costs of trade finance, for example, have increased with fewer funds available. And we must be prepared to confront another possible sudden reversal in capital flows, and ensure financial systems retain sufficient liquidity. We hope that the important recommendations of G20 Summit in London last week, including the one about the expanded support for trade finance, will significantly help improve the presently very difficult credit situation.
Aside from finance, the recession has had massive knock-on effects on ASEAN's real economies. Due to the region's high degree of openness, the synchronized slowdown has brought a precipitous drop in ASEAN exports, seriously affecting growth prospects. Intraregional trade has also fallen dramatically. Most economies are now facing the likelihood of factory closings, layoffs, supply chain disruptions, slower remittance inflows, and the threat of increased poverty.
This morning, I would like to discuss ADB's economic prognosis for ASEAN this year, the accompanying risks and policy issues, and what ADB's action plan is during these difficult times.
II. ASEAN economic outlook and risks
The current forecast, as we describe in our recent Asian Development Outlook 2009, is a deceleration in ASEAN's aggregate GDP growth to less than 1% this year.
This harder-than-expected landing will hit the five large ASEAN economies with their biggest slowdown since the 1997/98 Asian financial crisis. With its high degree of global financial market integration and dependence on external demand for production, Singapore is expected to suffer most, with GDP contracting about 5%. Malaysia and Thailand are also expected to contract. Indonesia and the Philippines will maintain some growth on resilient domestic demand, but will still be down several percentage points from last year.
A significant slowdown is also likely for Brunei, Cambodia, Laos PDR, and Viet Nam, due to a variety of factors, including low commodity prices (particularly oil), high dollarization, and plummeting external demand for specific manufactured goods, such as garments.
The balance of payments will deteriorate on worsening trade balances and capital flows, while foreign exchange reserves are expected to fall to varying degrees.
However, while the near-term outlook is bleak, we feel that a repeat of the 1997/98 Asian financial crisis is unlikely. Some will say that the only similarity with 1997 is the word "crisis." There are of course some other similarities, such as the reversal of capital flows, exchange rate pressures, and tighter credit, particularly for those with large foreign exposure.
But the differences overshadow similarities-the main one being that this crisis is not home-grown. So we are forced to manage ripple effects of a major external financial disruption, and a downturn in external demand. Both were not the case in 1997/98.
Thus, uncertainty over the depth and length of the global recession has significantly heightened the downside risks to this outlook:
First, any further financial disruption in US and Europe is likely to add stress to ASEAN financial systems. It could add volatility to asset prices, bring about further de-leveraging, reduce available credit, and ultimately hurt the region's bank balance sheets.
Second, should the global downturn become worse or last longer than currently forecast, the revival of ASEAN exports could be delayed, further cutting into manufacturing and industrial production generally. Coupled with this is the danger of re-emerging protectionism. While the G20 is committed to not let this happen, 17 of its members have put some protection-like measures in place, or have proposed to do so.
And third, while most of ASEAN has responded to the economic crisis with appropriate and timely policy measures, more must be done to stimulate domestic demand.
III. Policy Issues
Of course, we can't address today's problems with yesterday's reforms. ASEAN has learned much since 1997. For example, policy makers know the importance of safeguarding financial stability, while vigorously pursuing expansionary fiscal and monetary policies.
Given ASEAN's diversity, the optimal policy mix will necessarily differ across economies. But there are several dominant trends:
Safeguarding financial system stability, individually and collectively, is paramount to prevent a crisis of confidence, as occurred across several industrial country markets. Any signs of financial stress will require immediate stabilization measures, largely through central bank or related agency intervention.
Fiscal policy has moved center stage, and I note that several ASEAN members have introduced fiscal stimulus packages to varying degrees. To be effective, stimulus must be sizeable, timely, targeted, temporary, and well-coordinated. Assuming there is fiscal space, it is important to avoid a "too little too late" result. Projects or programs should be targeted that yield quick results-rather than those with long gestation periods. The key challenge is to strike a balance between quick demand-creation and long-term fiscal sustainability. Governments also need to carefully consider how to finance stimulus packages. Rather than divert existing finance, one should in most cases create more. This is where fiscal and monetary policies need to reinforce one another. With inflation falling in tandem with growth, there is room for continued easing of monetary policy across much of ASEAN, with central banks taking necessary steps to support liquidity in their financial markets.
To counter protectionist instincts, ASEAN should reaffirm its commitment to free trade and regional economic cooperation, refraining from undue export promotion or import restrictions. If anything, ASEAN members should work toward greater exchange rate coordination.
Finally, the global crisis also provides an opportunity to rebalance some of ASEAN's sources of growth toward domestic demand, without turning its back on globalization.
IV. Role of ADB
This global crisis calls for multilateral solutions. ADB was there in 1997. We are here today. Our response today, however, will be somewhat different. This global crisis requires multilateral development banks to employ available resources more effectively and flexibly to support growth and protect the poor.
ADB can play an appropriate counter-cyclical role by providing credit in areas where commercial players have retreated. We can do this by opening new financing facilities, activating current resources, and offering technical advice where needed-particularly where the lack of monetary room or fiscal space precludes demand stimulus.
At ADB, our overall aim is three-fold: to stabilize financial and private sectors; to maintain development momentum; and to protect the poor.
We intend to provide additional $10 billion out of our Ordinary Capital Resources to Asia and the Pacific as the financial crisis response in the next few years. About $1 billion will support trade finance with the remainder split among guarantees, quick disbursing assistance, and for project investments. We are planning to establish a quick disbursing facility to help our crisis-affected developing member countries meet urgent needs. Our Asian Development Fund will be reprioritized and front-loaded in 2009 for loans and grants.
Our trade Finance Facilitation Program with $1 billion will mobilize up to $15 billion in trade support by the end of 2013. We will expand the program in more developing member countries including the Philippines and Indonesia, and expect to have more participating banks in the developing member countries. We are also creating an Asian Infrastructure Financing Initiative, which will pool resources from development partners to help fill the infrastructure financing gap.
And we continue to support existing work within ASEAN and the wider regional architecture on economic monitoring, surveillance, and policy dialogue; bond market development; and creation of a Credit Guarantee and Investment Mechanism. These are some of the initiatives we are preparing to encourage the private sector and support government efforts to tackle the effects of the crisis.
I would also like to take this opportunity to thank our ASEAN partners for supporting our Fifth General Capital Increase, which we earnestly hope will be successfully approved by ADB Governors before our upcoming Annual Meeting in Bali.
In closing, I would like to reiterate that, while 2009 will undoubtedly be a difficult year for all of us, I am convinced ASEAN is up to the challenge. In essence, the current global crisis is an unprecedented external shock to ASEAN's financial markets, capital flows, export demand, and remittances and tourism receipts. Nonetheless, the global crisis should not derail ASEAN's plans for establishing an economic community. Quite the contrary, as the 1997 crisis proved, the crisis presents an opportunity to adjust strategies for financial stability, stimulate demand to rekindle growth, and rebalance the sources of growth, creating the foundation for sustainable development.