Zeti Akhtar Aziz: Strengthening of regional integration in Asia
Speech by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the
KoreaMalaysia Business Forum, Kuala Lumpur, 8 April 2010.
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It is my great pleasure to be here this afternoon to speak at the "Korea-Malaysia Business
Forum", in conjunction with the 50th anniversary of diplomatic relations between Korea and
Malaysia.
The global economy is now on the path of recovery after the worst financial crisis in decades.
This recovery is however uneven. Several of the advanced economies are still being
confronted with unresolved crisis-related issues, in addition to structural factors that will
constrain their growth performance in the years to come. Emerging economies, in particular
Asia, is leading the global recovery. The region is fast becoming the anchor of growth and
stability in the world economy.
New growth dynamics are already at work to reinforce the strength of Asia over the next
decade. Increased intra-regional economic and financial integration and other structural
factors are supporting this trend. While this trend will intensify, the future global environment
is going to be fundamentally different. Asia will be confronted with new challenges in this
changed environment. Asia, therefore, needs to be well positioned to effectively manage
these fundamental new global trends to ensure sustainability of our economic advancement.
The business community and policymakers need to rise to the new challenges and build on
our existing relationships. We can work together to forge a more integrated Asia in the areas
of trade, investment and finance and thus, strengthen the potential of Asia.
My remarks this afternoon will focus on three areas; the increasing regional economic and
financial integration in Asia, the implications on the evolving bilateral relationship between
Korea and Malaysia and on Malaysia's strategies for reforms to better position our economy
to rise to the new challenges of the global economy.
The emergence of the new Asia
In these 50 years, Asia has undergone several phases of economic transformation. While
individual countries have embarked on their own strategies and achieved tremendous
individual success, today, however, as the world becomes more interdependent, the
development of Asia has reached a new phase in which greater economic and financial
integration will contribute to unlocking our potential in the global economy.
Over the years, trade and investment barriers within the Asian region have been
progressively removed and capital mobility has been on the increase. Ties within Asia have
strengthened on several fronts, from trade to investment and financial linkages, as
policymakers recognise the importance of the region as a mutually reinforcing economic
entity. As a group, Asia has now emerged as a global economic powerhouse with the share
of GDP to world GDP amounting to 13.4% in 2009, about twice that in 1980. Going forward,
the IMF projects that developing Asia will grow by 8.2% in the next five years, higher than the
rate recorded in the period of 2000-2009.
The strengths within Asia has been most evident in the recent global financial and economic
crisis. Asia has demonstrated remarkable resilience in the face of the unprecedented
international financial crisis. Most regional economies have seen positive growth since the
second half of 2009, with prospects for a sustained recovery. The region has benefited from
strong fundamentals and the financial reforms undertaken in this recent decade which has
enabled the region to recover faster with a stronger performance.
Several other factors have contributed to this early recovery. First, the region had policy
flexibility to respond to the consequences of the international financial crisis. Strong fiscal
positions, including relatively low public debt levels, have allowed many Asian governments
to implement larger fiscal stimulus. Second, the financial sector in the region is in good
health. Disruption to credit flows to the private sector have been avoided. Third, households
and the corporate sectors in Asia are not over leveraged, and thus are in a better position to
resume consumption and business activity once confidence had returned. Fourth, Asia is
also not plagued with wide scale unemployment. Fifth, increased intra-regional trade has
contributed significantly to the resumption of international trade in most of the regional
economies. The strong surge in exports in the regional economies in the recent months is
due primarily to the significant rise in intra-regional trade.
Strengthening of regional integration
Regional integration will become an increasingly important factor in sustaining the future
growth in the region. Despite Asia's diversity in people, culture and traditions, the region has
been able to come together as a group to achieve greater integration in the areas of trade
and investment.
While trade remains an important contributor to growth in the region, of importance is that the
pattern of trade of the Asian economies has changed significantly. This decade has seen the
rise in intra-regional trade. Intra-regional trade in Asia has risen from 32% of total exports in
1995 to an average of 50% in 2008. Increasingly, as incomes rise in Asia, intra-regional trade
will increase to meet the rising domestic demand of regional economies. More than half of
the world's population resides in Asia that has a favourable demographic structure that
comprises of a significant young and dynamic segment. The growing middle class has
altered the consumption and savings patterns in the region, providing the region cumulatively
with a huge growing consumer market. Asia also has high savings which allows for higher
consumption while still having surplus funds to finance regional investment activity. The rapid
trade liberalisation across Asia has improved market access, creating a vast market for
goods and services. In addition, bilateral and region-wide free trade agreements are set to
expand further even as multilateral agreements continue to be pursued.
The growing pace of intra-regional investment flows has also gained momentum to
complement the region's trade integration. Businesses in the region are leveraging on
regional complementarities as well as taking the opportunity of the growing markets in the
region. In Malaysia, almost half of foreign direct investment into our country originate from
the regional economies. In addition, Malaysian corporations have also in recent years
increased substantially their presence in the region. The success of intra-regional investment
reflects the competitiveness and dynamism of Asia.
A more recent phenomenon is the increased financial integration. As this occurs, it will result
in a more efficient recycling of Asian savings into investments within Asia. Given that Asia
will need about USD8 trillion in infrastructure development over the next ten years, the
effective channelling of Asia's large pool of savings into productive uses within the region will
be important to support growth and development in Asia. Deeper financial integration within
Asia is already occurring as financial markets in Asia become more developed and mature.
Regional efforts are being intensified to accelerate this process, including in developing the
regional bond markets.
Policymakers in Asia have also come together in ASEAN+3 and the Executive Meeting of
East Asia Pacific (EMEAP) groupings to promote greater cooperation in maintaining regional
macroeconomic and financial stability. The more volatile and unstable international financial
and economic conditions have called for the need for greater regional surveillance for the
early detection of risks to the region. These have now been put in place including
mechanisms to enable the region to cope with rising uncertainties. Through EMEAP, regional
collaboration on surveillance has been enhanced to strengthen the region's vigilance and
resilience against potential crises. The ASEAN+3 member countries have already taken
steps to multilateralise the Chiang Mai Initiative towards a more advanced and robust
framework for the effective pooling and utilisation of liquidity support in the region.
The bilateral relationship between Malaysia and Korea
Malaysia's economic relationship with Korea is very much part of this integration process in
Asia. The bilateral trade and investment relationships between Korea and Malaysia over the
recent years has continued to increase with trade now averaging RM45 billion per annum.
Both countries have already benefited from the growing production networks within the
region as well as from the numerous trade and investment opportunities from an increasingly
open and liberal business environment.
Investment linkages, though still relatively modest, have been on an upward trend since
2006. Korean investment in Malaysia is predominantly in the manufacturing sector,
particularly the electrical and electronics sub-sector. The opportunity for further co-operation
in this area is vast. Korea, as a nation known for its knowledge-based and innovative
capabilities, can leverage on the liberal investment climate offered by Malaysia to diversify
into new growth areas such as green technology and biotechnology.
In the area of finance, Malaysia now has a well-developed financial system, with deep capital
markets including a comprehensive system of Islamic finance. The Malaysian bond market is
the fourth largest in Asia in terms of volume after Japan, China and Korea. More than 55% of
the outstanding bonds are Shariah-compliant and the sukuk market is the largest in the
world. In 2008, the Export-Import Bank of Korea and Industrial Bank of Korea successfully
raised a total of RM2 billion via bond issuance in the Malaysian bond market. Moving
forward, the sukuk market represents an important channel to reinforce regional financial
integration. It presents an opportunity for Korean corporations to raise financing and issue
sukuks out of Malaysia. In addition, Korean investors can also participate in the wide range
of Islamic financial instruments in the Malaysian financial markets, including from more than
150 Islamic unit trusts, Islamic REITs, wholesale mutual fund products and other Islamic
structured products.
In addition to robust economic ties and potential financial links, Korea and Malaysia enjoy a
growing mobility of talents. With the rise in Korean investment in Malaysia, this has led to an
increase in Korean expatriates. Koreans are also coming to Malaysia as students and to
participate in our Malaysia My Second Home programme. In addition, the Korean Wave,
which spread to Malaysia in early 2000s, has contributed to make our country more aware of
the Korean culture and traditions, thus promoting a better understanding between these two
countries.
Prospects for the Malaysian economy
Malaysia is an economy that is transitioning into a new phase of development. In the current
environment, our economy is now firmly on the recovery path. This year, the Malaysian
economy is projected to grow in the region of 5% with further upside potential. Domestic
demand is expected to become a major driver of growth as the private sector benefits from
the strong macroeconomic fundamentals, healthy balance sheet position and a resilient
financial system. Both fiscal and monetary policies are aimed at providing an enabling
environment for sustainable growth. Monetary policy will remain supportive of growth, while
attention will continue to be focused on ensuring that the private sector, in particular SMEs,
have access to financing. In addition, the Central Bank is now in the process of formulating a
new financial sector blueprint to chart the development of the Malaysian financial sector over
the next decade so that the financial sector will reinforce transition of the Malaysian economy
into a high value-added and high income economy.
As the Malaysian economy is gathering strength, the focus of policy has also shifted towards
laying the foundations for the economy into a high value-added, high income economy. In
this regard, the Government has recently announced the New Economic Model, which is
intended to accelerate Malaysia's development into a high income economy by 2020. The
broad thrust of the strategies is to re-energise the private sector to drive growth. This
involves providing an enabling environment in which high productivity, competitiveness and
innovation can take place. As part of these initiatives, further liberalisation of the economy
and the privatisation of selected Government-owned corporations are undertaken. This is
also accompanied by the Government Transformation Program to enhance the public
sector's efficiency. Throughout Malaysia's more than 50 years of development, the country
has demonstrated economic flexibility to successfully shift to the new areas of comparative
advantage to the new areas of growth. I believe, with the foundations in place, Malaysia has
every potential to transition into a high value-added, high income economy.
Concluding remarks
Asia's new role in the globalisation process has only just begun. The continuous dynamic
evolution of Asia as greater regional economic and financial integration take place will
contribute towards raising the standards of living in this region. In this context, the important
partnership between the Government and the private sector remains a key element in
ensuring stability and sustainable economic development in the future.