Speech by ADB President Takehiko Nakao on 20 September 2013 at the APEC Finance Ministers' Meeting - Session 1: Asia's Macroeconomic Outlook in Bali, Indonesia (as drafted).
Your Excellencies, distinguished guests, ladies and gentlemen:
Today, I would like to discuss the likely impact of the recent financial turbulence in Asia and policy responses to that turbulence. I will also touch on Asia’s medium-term challenges to sustain growth.
Asian financial markets are under pressure. Stock markets went down and currencies depreciated, most notably in India and Indonesia. This was triggered by capital outflows after the announcement of Chairman Bernanke in May to unwind quantitative easing in the US. It also reflects reversals of asset price increases and currency appreciation that resulted from large capital inflows following expansionary monetary policy in advanced countries after the global financial crisis. Until the spring, the problem discussed was the quite opposite to the one currently being discussed, that is, excessive capital inflows instead of outflows.
Despite the turbulence, the fear of a repeat of a 1997 type of financial crisis in the region is unwarranted at this moment. Developing Asia is now in a much stronger position to weather the storm. Most economies have current account surpluses, lower levels of external debt, and much higher levels of foreign reserves. Since 1997, the region has also made significant progress in putting in place sound macroeconomic management, financial regulation and supervision, and corporate governance.
India and Indonesia seem to have received particular attention lately. Rising current accounts and fiscal deficits, especially in the case of India for the latter, have made them more susceptible to changes in market sentiment--even as these problems have been there for some time. It should be noted, however, that both India and Indonesia currently have sufficient reserves to cover about 7 months of imports.
Considering that the quantitative easing withdrawal is now already well factored into markets, we expect the situation to stabilize with the correct and prompt policy responses. Asian governments have already taken a number of measures to boost market confidence, and these efforts need to be continued.
Fiscal positions need to be consolidated further including through reducing subsidies. Prudential policies must be strengthened to secure financial stability. To convince markets that developing Asia remains on a strong and sustainable growth path, structural reforms must be accelerated to alleviate constraints to long term growth and to encourage foreign direct investment.
It is better to have preparedness which would also enhance confidence in the market. Regarding ADB’s role, during the global financial crisis, ADB offered financial support through its Countercylical Support Facility and Trade Finance Program to meet immediate need of finance in the region. We can also front-load our lending operations in support of government requirements. Let me assure you that, if the need arises, ADB will strengthen its support in collaboration with government and other development partners.
Medium-term regional challenges
Let me briefly touch on medium-term regional challenges. In the medium term, developing Asia has the opportunity to reinforce growth prospects by working on “hardware” infrastructure investment and structural “software” reforms supported by regional cooperation. Pursuing such policies itself can have a stabilizing impact on the market.
Considerable infrastructure investment is needed for the region to catch up with global levels and to maintain current growth. The region needs at least $8 trillion for the 10 years up to 2020. Infrastructure has strong spillover effects on other parts of the economy within a country. Better regional infrastructure across borders can transform existing transport corridors into full economic corridors.
Clearly, public finance such as ADB is insufficient to fill the vast financing needs. So we must leverage the region’s ample yet untapped savings and considerable foreign reserves. One example is the ASEAN Infrastructure Fund, currently chaired by Indonesia and supported by ADB. This can act as a model for larger infrastructure funds within APEC. In addition to financing pure sovereign projects for infrastructure, such funds can finance public-private partnerships, or PPPs.
More generally, private sector participation is essential for infrastructure projects. Institutional investors, like pension and provident funds, can channel vast pools of savings into infrastructure projects. We are very pleased to see the APEC Multi-Year Plan for infrastructure development and investment, in particular the creation of a practical pipeline of bankable infrastructure projects. Creating a PPP Experts Panel and pilot PPP Centers is an important step.
Finally, greater regional cooperation can go beyond regional hardware infrastructure projects by promoting regional software reforms, such as trade facilitation and harmonization of standards. Again, APEC’s geographic ambit allows the open dialogue needed to accelerate such software reforms.
To conclude, the current financial turmoil in Asian emerging markets mostly reflects short-term volatility in capital flows. If right and prompt policy actions are taken, these problems should not affect Asia’s long-term growth potential.
Policies can be strengthened by pursuing targeted reforms and investments, especially in much-needed infrastructure, both hard and soft. With necessary reforms, the region can become more integrated and economically stronger.
We believe APEC can do much to encourage needed policies and cooperation across the region and across continents. And I assure you ADB will continue to be part of the efforts to maintain stability and further prosperity in the Asia Pacific region.