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Financial Development for Sustained Growth: Outlook, Risks and Policy Priorities for ASEAN
Speech by Haruhiko Kuroda, ADB President, at the 15th ASEAN Finance Ministers Meeting on Financial Development for Sustained Growth: Outlook, Risks and Policy Priorities for ASEAN, Bali, Indonesia
Your Excellencies, ladies, and gentlemen:
Thank you for this opportunity to brief you on ADB's economic outlook for ASEAN. By and large, ASEAN has moved beyond the global crisis. The region is rolling back short-term stimulus and normalizing monetary policy. For many, the immediate concern now is inflation. With recovery in the advanced economies still fragile, regional demand will play a key role in sustaining growth. For ASEAN, the paramount challenge is to sustain robust, more inclusive growth, while staying the course toward a well-functioning ASEAN Economic Community by 2015. In the longer term, continued financial development, coordination, and integration will bolster ASEAN trade and investment.
Before I elaborate on these points, let me give you a brief overview of ASEAN economic prospects.
II. Economic Outlook, Risks, and Short-term Policy Issues
ASEAN rebounded strongly last year from the crisis. Importantly, while the recovery in world trade contributed, it was domestic demand that really drove the region's expansion. In fact, domestic demand was strong enough to supplant stimulus and foreshadow the region's return to "normal" growth. We expect ASEAN economies to moderate somewhat in 2011 before strengthening in 2012. Our flagship Asian Development Outlook 2011–launched 2 days ago–forecasts aggregate ASEAN growth at 5.5% in 2011 and 5.7% in 2012.
Among ASEAN countries, the more trade-dependent economies closely mimic global trends. These economies will see more of a slowdown due to slower growth in external demand. For example, Singapore's 14.5% growth spurt will likely cool to 5.5% this year. Malaysia, Thailand, and the Philippines should moderate from last year's 7-8% growth rate to about 5% in 2011. Indonesia and the other ASEAN economies should grow somewhat faster this year, though Viet Nam may face the challenge of tackling critical macroeconomic issues.
Output gaps in ASEAN have narrowed and inflationary pressures are rising through a variety of channels, creating a major risk to the outlook. Higher commodity prices—especially food and fuel—are adding to the pressure. Tensions in the Middle East are also keeping oil prices volatile.
Japan's situation, too, will affect ASEAN. Beyond the incalculable human toll, the economic impact will disrupt Japan's short-term growth. And, with its importance as trading partner, ASEAN will experience some effects. Japanese components are important inputs for the region's production networks. However, we think that the medium-term impact may be relatively small; the massive reconstruction process will create stronger demand and affected Japanese companies will make necessary adjustments.
Anemic economic recovery and ongoing fiscal issues in Europe and the US are another risk that could dampen external demand. And large and destabilizing capital flows could complicate the region's macroeconomic management and reduce growth prospects.
The immediate policy issues are thus controlling inflation, appropriately managing capital flows, and using exchange rate policies to help mitigate volatility and support rebalancing growth toward greater domestic and regional demand.
III. Sustaining Growth: Medium-term Priorities
Handling these shorter-term issues, however, should always be done with an eye on more long-term goals. For ASEAN, the first major milestone ahead is achieving a functioning ASEAN Economic Community (AEC) by 2015. A key component in supporting the trade and investment required of an economic community–and achieving ASEAN's long-term growth potential–is to bring ASEAN financial sector development to the next level. In essence, this is the theme of this year's meeting.
We know the primary role of finance is to efficiently channel savings into productive investment. Increasing access to finance can also spread investment and business opportunities beyond urban centers and to small and medium enterprises and rural areas, thus making growth more balanced, inclusive and sustainable. This is especially critical as we support the 2011 initiative led by ASEAN Chair Indonesia to stress "people-oriented" programs.
An efficient financial system also promotes competition. It allows new market entrants, particularly small and medium enterprises–which are proving to be the main drivers of better-balanced growth–to obtain easier funding at lower costs.
While there has been significant progress, financial sector still lags well behind that of advanced economies. Some even say finance has yet to meet the existing demands of ASEAN's real economy.
There are also wide disparities in financial depth. For example, the ratio of bank credit to GDP ranges from around 10% for the Lao People's Democratic Republic (PDR) to around 130% for Thailand. Stock market capitalization to GDP ranges from around 20% in Viet Nam to over 170% in Singapore. These are among the development gaps we need to bridge, as financial depth has positive growth effects.
As you discuss today the progress and future roadmap for the ASEAN Finance Ministers' Process, it is important to keep in mind that each element of monetary and financial integration—from banking to capital market development to financial and capital account liberalization; and even dialogue on exchange rate coordination—begins first and foremost from strengthening national financial systems.
At the national level, strengthening banks and improving regulation and supervision are vital, and so are adopting international prudential norms and standards. Reforms will, of course, be specific to each domestic financial system. Efficient financial systems also require competition and economies of scale—which eventually lead to international competition. And the benefits of integration must be balanced against the risks of liberalization, so progress must be gradual. Steady liberalization is essential, but it needs to be accompanied by sound institutions that ensure market stability.
At the regional level, it is important to strengthen dialogue and financial market surveillance; promote international norms; and adopt codes of practice and mutual recognition of minimum standards. Similarly, ASEAN should continue to foster bond market growth and build market infrastructure such as regional clearing houses, payment and settlement systems, credit rating agencies, research and training facilities, and databases.
As national financial systems are connected through cooperation and integration, potential spillover effects from vulnerabilities or crises will increase. Therefore, as monitoring and surveillance deepens nationally, it must also deepen regionally. This is where ASEAN and its partners should build a strong regional surveillance mechanism. It will enable authorities to deliberate and act to prevent, or at least mitigate, potential problems. And it can work within the ASEAN framework or as part of a wider network.
For instance, ASEAN–possibly with its "Plus Three" partners–could cooperate on exchange rate policies. The objective is to ensure intra-regional exchange rate stability amid inter-regional exchange rate flexibility. This could promote intra-regional trade and investment and help rebalance the region's sources of growth.
I believe the ASEAN+3 Macroeconomic Research Office, or AMRO, is a good step forward. It will add to the ASEAN+3 Economic Review and
Policy Dialogue process in helping define where macroeconomic policy coordination should proceed.
ASEAN has grown in stature, in part because of its cautious, pragmatic and consensus-based approach. Yet today's emerging challenges and opportunities require strengthened institutions.
Two principles can guide efforts to strengthen ASEAN—openness and transparency. ASEAN should embrace "open regionalism" by making the most of regional and global institutions. And greater transparency would help ASEAN enhance accountability and strengthen governance.
ADB stands ready to help. For example, through technical assistance, ADB is working closely with Cambodia, Lao PDR, and Viet Nam, on capacity-building where financial needs are most evident.
We are promoting the establishment of an Asian Financial Stability Dialogue, a tripartite process of finance ministries, central banks and financial regulatory authorities, to coordinate supervisory and regulatory developments and monitor potential financial vulnerabilities through use of early warning systems.
Your Excellencies, ladies and gentlemen - I have focused my analysis of the ASEAN region's economic prospects on the financial sector. But there are other important challenges. Overall, we believe that economic connectivity through financial sector development needs to be complemented by trade facilitation and physical connectivity through infrastructure development.
As you know, the quality and quantity of infrastructure in ASEAN still lags behind other developed regions, and there are still significant trade facilitation challenges that need to be addressed. Last year, ASEAN leaders issued the Master Plan for Connectivity, recognizing the importance of physical and institutional connectivity. At ADB, we have been steadily increasing our assistance on infrastructure and enhancing our focus on transport and trade facilitation to enable the full impact of connectivity. We are also working with you for the proposed establishment of the ASEAN Infrastructure Fund. We hope that through such efforts, the common goal for regional cooperation and development will be achieved.
To conclude, ASEAN's recovery appears secure. ASEAN is taking steps to ensure its economic growth is better balanced, sustainable, and more inclusive.
Financial sector development is a key component of the roadmap to the AEC. And as national systems develop further, regional cooperation will continue to enhance and smooth the process. I am pleased to see ASEAN assume a more prominent role in global economic governance, with Indonesia as a G-20 member and ASEAN maintaining an observer status. ADB will continue to work with you to achieve an ASEAN Community that forms a hub of regionalism, based on both economic and physical connectivity, within Asia and the increasingly globalized economy.