Eddie Yue: Structural reforms needed to improve Asia's economies
Statement by Mr Eddie Yue, Deputy Chief Executive of the Hong Kong Monetary Authority,
and Head of Delegation, Hong Kong, for the 47th Asian Development Bank Annual Meeting,
Astana, Kazakhstan, 4-5 May 2014.
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I would like to express my gratitude to the Government of Kazakhstan for hosting the 47th
Annual Meeting of the Asian Development Bank (ADB) and the people of Kazakhstan for
their hospitality. I would also like to thank the Management and staff of ADB for the excellent
organisation of the event.
Since the last ADB Annual Meeting, we have seen a modest and uneven global recovery,
with the advanced economies showing a pickup in economic activities while emerging market
economies (EMEs) generally experiencing a moderation in growth. Financial markets have
turned more volatile in response to the changing pattern of global growth and expectations of
a turning point in US monetary policy, and a number of EMEs have seen a sharp reversal of
capital flows.
Regional economies have remained relatively resilient in the recent bouts of financial market
volatility, thanks mainly to the stronger fundamentals of the region nowadays. Since the
Asian financial crisis, many regional economies have implemented reforms to improve their
macroeconomic management and fiscal positions, built up foreign reserves and strengthened
their financial sectors. For some economies that were more affected by the recent financial
market turmoil, they have also taken credible policies to address domestic imbalances and
have been successful in restoring investors' confidence so far.
Nevertheless, we cannot afford to be complacent as what we had experienced in the past
year was probably a prelude to, rather than the end of, a period of heightened market
volatility. The sentiment of global financial markets has turned more sanguine recently amid
expectation of prolonged low interest rates in the US. However, the pace of monetary
normalisation in the US is very much uncertain and data dependent. With a large part of the
cumulated capital inflows to Asia since 2009 still in the region, it is possible that regional
economies with domestic vulnerabilities built up during the period of ultra-loose global
monetary conditions could experience sharp corrections when capital flows ultimately
reverse. It is therefore imperative that regional economies should make use of the current
breathing space to put their own house in order, take credible measures to reduce
macroeconomic and financial imbalances, step up surveillance and ready contingency plans
and liquidity backstops such as the use of foreign reserves and bilateral/multilateral swap
lines to mitigate systemic risk in the financial systems when the need arises.
A sharp reversal of capital flows could deal a severe blow to low-income countries, as
reduced private capital, exports and remittance could have a disproportionally large impact
on their less diversified economic structure. ADB should draw on the experience in the
aftermath of the global financial crisis and stand ready to provide timely and flexible
crisisrelated assistance to its needy members.
While macroeconomic policies and prudential measures could help smooth cyclical economic
fluctuations, in the longer term, credible structural reforms are needed to sustain the growth
of the region and preserve investors' confidence. The vulnerabilities now faced by some
regional economies are in part due to the overheated domestic demand in the past years
amid strong capital inflows. However, they also reflect, to a considerable extent, supply-side
constraints on potential output and limited capacity of the region's financial markets. While
the situation differs across economies in the region, there are a number of structural reform
needs that are common to the region and in which the ADB can play an active role.
First, the supply-side constraints in a number of regional economies are linked to weak
investments, in particularly infrastructure investments. Many investors have cited that there is
no lack of funds or interest in investing in Asian infrastructure projects. The problem,
however, is a lack of a pipeline of bankable projects, which in turn is due to fundamental
issues such as uncertainties relating to the government's commitment in supporting a
specific sector; lack of a credible PPP framework; political force majeure; and project
governance. In this regard, the involvement of multilateral agencies such as ADB would be
very useful in that not only will it foster investors' confidence if the multilateral agencies put in
their own financial resources, but it will also help build the governments' capacity in
structuring projects, strengthening the PPP framework and improving project governance to
make their infrastructure projects commercially viable.
Secondly, shortfall in educational inputs has been seen as one of the major constraints for
some developing economies to enhance productivity and move up the value chain. It has
also been a major reason for the remaining pockets of poverty in the region, including in
countries where substantial economic progress has been made but a substantial proportion
of the population is still living in poverty. We encourage ADB to further strengthen its support
for the educational sector and developing human capital, which are essential to enhancing
competitiveness, eliminating poverty and addressing the rising inequality in developing Asia.
Thirdly, intra-regional trade has been an important source of growth after the global financial
crisis as regional economies increased their domestic demand and reduced their reliance on
exports to advanced economies. As the global economy continues to rebalance, the prospect
of the region to sustain its growth would very much depend on its ability to hold up domestic
demand through sustained productivity enhancement as mentioned above, and further trade
integration within the region. While intra-regional trade has been growing fast, a further
reduction in trade barriers should help promote deeper regional trade integration and
facilitate more efficient resources allocation. A wider use of local currencies in trade
settlement and financing would also help diversify sources of trade financing and reduce
currency risk and transaction costs.
Lastly, regional economies need to deepen financial market reforms and promote greater
financial integration within the region to better channel Asia's surplus savings to meet its own
investment needs; to support growing trade integration; and to enhance the absorptive
capacity of our financial markets to capital flows. Further liberalisation of the financial sector
and improving financial infrastructure such as establishing credit information sharing system
and microfinance institutions should also help some regional economies to allocate credits
more efficiently. Over the years, ADB has contributed to financial sector development in the
region through its own programmes and through supporting regional initiatives such as the
Asian Bond Markets Initiative under ASEAN+3, and we welcome the Bank's continued
commitment in this regard going forward.
It is noted that a number of the above structural reform areas have been identified as
strategic priorities in the Bank's midterm review of Strategy 2020. With its expertise, we
believe ADB has an important role to play in helping the region to tackle the challenges
arising from the highly uncertain global environment, and embark on structural reforms to
raise its long-term growth potential. We look forward to ADB's continued engagement with its
members to provide support that will cater for their changing needs as the region continues
to progress and transform.