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I. Introduction
Honorable Ministers:I am honored to speak with you today at this landmark meeting - the first as a separate gathering of ASEAN+3 Finance Ministers. It is also a timely meeting, coming within a week of the Rome gathering of G7 finance ministers and central bank governors and just before the G20 Finance Ministers' Meeting. The global economy needs our attention. And I am pleased to see that ASEAN+3 is taking its rightful place in shaping events.
Today I would like to talk about the global and regional outlooks, how we should respond, and what role ADB can play in this process.
II. Global outlook
Let me begin with the global outlook. We knew the crisis was coming; but perhaps we underestimated how hard it would hit. Credit markets continue to reel. Even though they are now functioning, they are far from optimal levels. The TED spread remains just under 100 bp - well below the 400bp of last October, but a long way from the usual 20 bp spread. Most asset classes have been plummeted by the crisis. And analysts believe the Case-Shiller composite index of US house prices, which dropped 25% since mid-2006, needs to fall another 10% to return to its normal level relative to US household incomes.
With continued financing constraints and weakening business sentiment, this global downturn is becoming more severe and prolonged. G3 economies are all in recession. And the IMF now sees 2009 world economic growth at a meager 0.5%. We clearly have not reached bottom. And worse, we don't know what's lurking around the corner.
For most of us around this table, the ultimate concern is not just crumbling exports, a reversal in capital flows, or lower remittances in the economies where those matter most. It is the lack of consumer and business confidence and reduced domestic demand, and the worrying prospect of significant segments of our populations falling back into poverty.
III. Regional outlook
This may sound bleak, but it is a reality we need to face. In the economies of emerging East Asia, ADB's December growth forecast was 5.7% for 2009, down from an estimated 6.9% last year. Things move pretty fast, and our flagship Asian Development Outlook will update - and no doubt lower - our forecasts on March 31.
More recently, the IMF's January outlook was for Japan's 2009 growth to contract 2.6%, China's exceptional expansion to slow to 6.7%, and the ASEAN-5 to slow to a GDP growth of 2.7%. The most striking revision however related to the Newly Industrializing Economies, or NIEs, consisting of Republic of Korea; Hong Kong, China; Singapore; and Taipei,China. GDP for the group as a whole is projected to contract by 3.9% in 2009 after a 2.1% growth in 2008, mainly as a result of massive export slump.
IV. How do we respond-what tools do we have?
Colleagues around this room and the leaders you represent are to be commended for your quick initial response. You swiftly and rationally assessed available monetary and fiscal options and made the effort to undertake immediate necessary steps. Not only does this injects liquidity when needed and supports institutions when required, but just as importantly it contributes in whatever way possible to boost public and business confidence. The results of these actions are something we must still assess, and is one main reason we are all here today.
But I think it is clear that we need to do more.
Monetary and fiscal conditions vary greatly across Asian economies, and there is no "one size fits all" policy prescription. An appropriate mix of fiscal, monetary, and financial policies suitable to specific country requirements - as well as structural reforms - must be adopted. For example, to reduce savings and increase spending, social safety nets and the investment climate need to be improved. To address rising risk aversion as a result of increased uncertainty, policies should be attuned to rebuilding confidence. In fiscal policy responses, priority must be given to expanding high-multiplier government spending.
Policy responses need to be thought out not only with short-term benefits in mind, but also with the medium- and long-term impacts in focus. Governments can use some fiscal measures to limit the impact on the poor. Cash transfers, for instance, could alleviate some of the immediate pain for the poor, while at the same time supporting growth in the short run. This works because it is the poor who are most likely to spend transfers immediately rather than save them. But policy responses taken now must also address longer-term development needs by increasing spending on social infrastructure and public goods. This crisis gives us the opportunity to tackle these short- and long-term challenges with a focused and, I must emphasize, coordinated response. And that brings me to regional cooperation.
V. Advantages of regional cooperation
The lessons of 1997, for better or for worse, have been ingrained in our collective psyche. Part of our challenge today is to raise those responses that worked to a higher level. And we at ADB believe that regional cooperation is the way to go.
Surveillance, monitoring, and intensified dialogue is a given. This has been going on for the better part of a decade. But we need perhaps to define objective parameters so that we can realistically measure collective performance and assess where and how we might assist.
Obviously, progress on the multilateralization and expansion of the Chiang Mai Initiative is at the forefront, with the CMI becoming a reliable mechanism-and a precedent perhaps-of future cooperative initiatives. ADB is willing to help in any way possible in moving this crucial and important initiative forward. But a multilaterlized and expanded CMI, as important as it is, is a critical first step only if it is operationalized quickly.
There remains the need for foreign exchange policy cooperation and coordination. With the notable exception of the Japanese yen and the Chinese renminbi, most Asian currencies tumbled against the US dollar since mid-September. But what's more worrisome is the heightened volatility and growing divergence in currency movements within the region. For example, the won lost about 35% of its value against the US dollar over the past year or so. In contrast, the Japanese yen appreciated by 20% vis-à-vis the US dollar over the same period.
While we all understand how sensitive this is, helping stabilize currency movements between trading partners in our region can fortify the accelerating trend of intraregional trade and investment flows. We should avoid competing against each others' currency depreciations. After all, when the dust of the crisis settles and there is less demand for US dollars by US financial institutions, capital flows may naturally head our way once more. And we should be ready with a coordinated response to what would likely be renewed appreciation pressures.
Finally, if Asia wants to remain a driving force of global economic growth, its economies must shy away from the natural tendency toward protectionism in times of crisis. It is easy to succumb to political pressures for subsidies or new tariffs. And just as important, avoid the financial protectionism that can accompany public acquisitions of private financial institutions. We should be firm in our joint commitment in support of free trade.
VI. How ADB can help
Under our new long-term strategic framework, our Strategy 2020, ADB has ramped up the goals for regional cooperation and integration, aiming for at least 30% of operational spending by the year 2020. This will appear in a variety of activities.
We are responding to the global crisis by helping our developing member countries contain its immediate effects. At the national level, direct and indirect funding support is being provided through ADB operations.
At the regional level, as you know, we are working with ASEAN+3 to promote local bond market development through the Asian Bond Markets Initiative. In particular, we are working with ASEAN+3 to accelerate the establishment of a credit guarantee facility to make it easier for private companies to meet their local currency funding needs. This facility could provide credit guarantees for bonds issued by domestic commercial banks to revitalize capital inflows and allow banks to continue lending.
We are also working on an Asian Infrastructure Financing Initiative - an operational co-financing program - to pool resources to meet the infrastructure needs of the region. We must tap regional savings more effectively for financing regional investment and thus promoting economic growth.
We remain steadfast in our commitment to a poverty-free Asia and Pacific. For us to fulfill our mission of poverty reduction under the direction set out in Strategy 2020, ADB is now, however, facing resource constraints and requesting shareholders for an immediate and substantial capital increase. This is absolutely essential to enable ADB to play a meaningful and proactive role in the social and economic development of the region during these very difficult times.
VII. Conclusion
Ladies and Gentlemen, I know our time is short. But let me once again thank you for the opportunity to address you here today on the urgent challenges facing our region. I will be extremely interested in hearing your responses and your own prognosis of this challenging year, and how ADB can assist in achieving our collective goals.
Thank you.