Zeti Akhtar Aziz: A more integrated and cohesive Asia in the global
economy
Speech by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the Foreign
Bankers' Association of the Netherlands, Amsterdam, 22 June 2010.
* * *
Asia is one of the more diverse regions in the global economy. Yet over the decade following
the Asian financial crisis in the late 1990s, Asia has become a more integrated and cohesive
region. The accelerated economic transformation of Asia during this period has reinforced
this trend to sustain Asia as a high growth centre in the global economy. Asia has also been
distinctive in terms of the resilience of its financial system in withstanding the recent
international financial turmoil. This has allowed Asia to emerge with an early recovery in its
economic growth process.
It is my honour and great pleasure to be here on the occasion of the Annual General Meeting
of the Foreign Bankers' Association of the Netherlands to speak on the developments that
are taking place in Asia and the potential role of Asia in the global economy and the
international financial system. Greater interdependence in the world economy is particularly
relevant to Asia, As highly open economies, Asia is highly connected to the rest of the world
and therefore vulnerable to external developments. At the same time, with its growing
significance in the world economy, developments in Asia will also have implications on other
parts of the world.
Accelerated transformation of Asia
For more than five decades Asia has sustained high economic growth. More important,
however, is the significant economic transformation that has occurred during this recent
decade, in response to the changing domestic and international environment. Asia now and
Asia previously is therefore significantly different. Asia today contributes about one third of
world output and 28% of world trade. Asia's progress and development has lifted millions out
of poverty, creating extensive employment and improving living conditions with better
education and healthcare opportunities.
The economic transformation has essentially resulted in more diversified sources of growth
for Asia. From being export-led, domestic demand has now become an increasingly
important source of growth. This is also reinforced by the shift from the public sector to the
private sector as the main driver of growth. While Asia is highly diverse, a common feature
prevailing is the tremendous economic flexibility of the Asian economies. Institutional
development, the large skilled workforce, the shift to greater market orientation and the
general macroeconomic stability have allowed resources to continuously shift to new areas
of comparative advantage and for the Asian economies to remain competitive. Being highly
diverse, Asia has also been able to leverage on the complementarities that exist in the
different economies. This has generated an expansion in intra-regional trade, intra-regional
investment activities and an increase in financial linkages between the economies in Asia.
The Asian financial crisis was a defining moment for Asia. While most economies were able
to recover in just over a year, in the decade that followed, wide ranging financial reforms
were implemented. In addition, the development of the financial markets and the financial
infrastructure were aggressively pursued to strengthen the capacity of the financial system.
The legal framework and the regulatory and supervisory framework of the financial sector
were also strengthened. Several important lessons from the crisis were also addressed, in
particular, avoiding the excessive accumulation of debt whether by the household, corporate,
financial sector or the public sector. Measures were taken to avoid the build-up of such
leverage and excesses largely through prudential regulation. In addition, buffers were built
during the good times.
These reforms have yielded tremendous payoffs for Asia. With more developed financial
markets and with better capitalised banking institutions equipped with strengthened risk
management and governance practices, Asia did not experience any disruptions in financial
intermediation during the 2008-2009 global financial crisis. The continued access to
financing has in fact been important in sustaining domestic demand and in supporting Asia's
rebound from the recent global crisis.
The International Monetary Fund estimates that the emerging economies in Asia will grow by
an average annual rate of 8.6% in the next five years. Asia is therefore very much part of the
global shift that is taking place in which the economic power in the world will become
increasingly more dispersed with the emergence of several growth centres in the global
economy. Should Asia continue to grow by an average annual rate of 7% over the next ten
years, it is estimated that Asia's share of the global GDP will increase to 40%.
Let me further elaborate on these two developments, namely the strengthening of domestic
demand in Asia and the intensification of regional economic and financial integration, that are
mutually reinforcing in sustaining Asia's economic growth prospects. A more recent
phenomenon supporting this trend is the strengthening of regional financial cooperation not
only to preserve regional financial stability but also to enhance the prospects of the region.
Strengthening domestic demand
The strengthening of domestic demand is part of the structural changes taking place in Asia
to diversify its sources of growth. Growth in most of the Asian economies was previously
export-led. While several measures have been taken to promote domestic demand, the
favourable demographic structure, the low levels of unemployment, the relatively low level of
household debt and the policy flexibility to implement supporting monetary and fiscal policies
have contributed to higher consumption. Other measures initiated are the social safety nets
in the form of schemes and programmes for unemployment benefits, healthcare, education
and retirement that have been put in place to reduce the need for high savings. The
consequent increase in consumption demand has not only resulted in a significant expansion
of the retail trade sector but Asia is also increasingly becoming an important consumer in the
global economy.
Private investment activity is also beginning to pick up after a period of over capacity due to
the excesses prior to the Asian financial crisis. There are also plans for massive investment
in infrastructure development to sustain the economic competitiveness of the region. The
Asian Development Bank estimates that Asia will require about USD 8 trillion of infrastructure
investment in the next decade. Most important is that Asia has the internal capacity from its
high savings to finance these infrastructure requirements.
The stronger domestic demand in Asia is also well supported by the strengthened financial
systems following the restructuring of the banking sector, the development of the capital
markets and the strengthening of the regulatory and supervisory systems in the post-Asian
financial crisis period. The reforms implemented also included the progressive deregulation
and the move to greater market orientation and increased liberalisation.
Today, Asia's capital markets are significantly deeper and more liquid. The bond market in
emerging East Asia has increased by more than seven-fold since 1996, with a current value
of USD 4.2 trillion dollars. Emerging East Asia accounts for 7.2% of the total worldwide bond
market at end-2009 compared to 2.5% in 1996. Asian banks have stronger fundamentals
with improved risk management and governance practices, with capitalisation well above the
regulatory requirements and with non-performing loans maintained at historical lows.
Riskbased approaches to supervision have also been widely adopted across Asia. In addition,
efforts also continue to be directed towards building institutions to protect consumers, to
promote financial inclusion, enhance market discipline and to augment management
capabilities. These efforts have ensured continued financial intermediation process and that
this access to finance remains an important factor that supports the growth of the economies
in the region.
Intensification of regional economic and financial integration in Asia
The second major development that has been taking place in Asia is the intensification of
regional economic and financial integration. While the individual economies in Asia continue
to implement policies and reforms at the national level, greater attention is being placed on
strengthening economic and financial linkages in the region. Intra-regional trade which has
been a major contributor to the recent recovery in Asia, has risen from an average of 32% of
total exports in 1995 to exceed an average of 50% in 2008. Of importance is the rising share
of intra-regional trade for final demand in Asia. This reflects an important change in the
pattern of trade amongst the Asian economies. The pace of intra-regional investment flows
has also gained momentum. Businesses in the region are increasingly leveraging on regional
complementarities as well as taking advantage of the opportunities created by the growing
markets throughout the region.
A more recent development is the strengthening financial integration within the Asian region.
While regional financial integration will further facilitate the already strong trade and
investment linkages in the region, a more important aspect of the increased financial
integration in Asia is the more efficient intermediation of funds in Asia. This includes the
recycling of some part of the sizeable savings in Asia to productive investments in the region.
The average savings rate in Asia is 35% of GDP and Asia as a group has a total of
USD 4.8 trillion in foreign reserves. With greater liberalisation of the financial sector and the
capital account, and the increased linkage of the national payments systems in Asia, there
are increased financial flows within the region. This trend is reinforced by the increased
presence of regional institutions in the individual domestic financial systems and Asia's
favourable economic prospects and more developed financial markets. This has already
resulted in volatile capital flows to the Asian region. Going forward, papers issued out of Asia
will also likely assume greater importance as an asset class. It will serve to facilitate the
further diversification of risks and thus, contribute to stability of the international financial
system. It will also expand the options for investors and borrowers and thus, contribute to
more efficient allocation of financial resources across borders.
Asia's economic and financial integration, however, extends beyond its own region to the
traditional markets in the developed economies, and more recently to other emerging
economies in other parts of the world. Today, the economic and financial linkages between
the emerging economies have also gained significance. While world trade has, on average,
expanded by 16% over the period 2004-2008, Asia's trade with the Middle East and Latin
America has increased on average by about 30%. Asia's trade with other emerging
economies now stands at 13% of Asia's total exports.
A further recent development is the increasing international dimension of Islamic finance
which is also influencing the global patterns of financial and trade flows. Islamic finance
today has contributed to increasing the financial and economic ties between Asia and the
Middle East. The emergence of new financial centres in Asia and the Middle East has seen
stronger investment and financial flows between the two regions. With the greater
internationalisation of this form of financial intermediation, it has also opened up the
prospects for the developed economies to forge stronger financial linkages with these
dynamic growth regions of Asia and the Middle East.
The inherent features of Islamic finance require that financial transactions are supported by
an underlying economic activity, thus ensuring that there is a close link between financial and
productive flows. Islamic finance is also based on the principle of profit-sharing and therefore
risk sharing. Islamic financial transactions clearly define the arrangements at the outset, and
provides the incentive for the appropriate due diligence to be undertaken by the Islamic
financial institutions to ensure that the profits are commensurate with the risks being
assumed. Aspects of governance and risk management are therefore strongly emphasised in
the arrangements. This arrangement also demands for higher standards of disclosure and
transparency which in turn, acts to strengthen market discipline.
Regional monetary and financial cooperation
The Asian financial crisis has also prompted greater regional monetary and financial
cooperation. Earlier regional cooperation had focused mainly on trade, investment and
development. This decade has seen the cooperation shift to efforts to address financial
stability issues, namely surveillance, crisis management, liquidity support arrangements,
financial supervision and financial market development. Other areas include the payments
and settlement system and capacity building in the financial sector.
The route that Asia is taking to forge greater financial integration will therefore be different
from that of Europe. Unlike in the European Union, Asia does not have centralised
institutions to coordinate financial integration but rather has leveraged on the existing
intraregional groupings and networks to forge greater cooperation and collaboration in areas of
common interest. This is mainly through the ASEAN+3 and EMEAP which comprise the East
Asia Pacific central banks. Secondly, a common currency is not on Asia's medium term
agenda. To minimise exchange rate risks and to facilitate intra-regional trade and
investment, a number of countries have initiated bilateral arrangements to use domestic
currencies for trade settlement. There is also now a pooling of reserves so as to have in
place liquidity support facilities for the region.
Conclusion
Let me conclude my remarks. Asia is very much part of the changes that are taking place in
the global economy and the international financial system. Going forward, the pace of Asian
regional economic and financial integration will gain momentum, driven by structural factors,
by the conscious policy to put in place the enabling environment and by the benefits derived
that are mutually reinforcing.
The evidence in this decade has demonstrated that a more integrated and cohesive Asia
contributes towards more balanced global growth, while a more resilient Asia contributes to
greater global financial stability. While a more connected world in this new phase of
globalisation will bring new vulnerabilities, it also brings with it the promise of new
opportunities, new relationships and partnerships in the world economy, and thus, new
prospects for a greater shared prosperity.