Heng Swee Keat: The next stage - policy challenges in Asia
Keynote address by Mr Heng Swee Keat, Managing Director of the Monetary Authority of
Singapore, at the Paris Europlace International Financial Forum, Singapore, 26 October
2009.
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Governor Noyer,
Your Excellencies,
Ladies and gentlemen,
Good morning
It gives me great pleasure to join you today at this Paris Europlace International Financial
Forum. Let me warmly welcome Governor Noyer and our overseas visitors to Singapore, and
welcome Mr Bresson and your team for holding this Forum in Singapore.
Policy challenges ahead
A year ago, the global financial community was grappling with a severe crisis that hit every
part of the globe and every sector. We were on the edge of an abyss. The timely and forceful
action by authorities, including the use of unconventional monetary policy tools, helped avert
the worst. In recent months, the global economy and financial markets are showing signs of
stabilization. Though we are yet to see a firm or sustainable rebound in final demand, there is
a sense of relief, even optimism.
Now, what's next? What will be the shape of the recovery, and what policy actions are
appropriate? It is difficult enough to make policy judgments in normal cyclical downturns. It is
even harder now that this downturn is not a garden variety recession. The impact of a
financial crisis emanating from the largest economy in the world that also serves as the
world's economic locomotive and provides the global reserve currency is likely to be
pervasive and longer-lasting. There are no easy precedents, and we have to remain alert to
new surprises.
Moreover, the key pillars of economic theories that underpin much of our policy thinking are
now being vigorously questioned.
We need much more thinking and empirical work on how economies and people behave to
draw out the critical lessons from this crisis. But based on what we know, we need to
undertake policy changes to build a more stable, sustainable and resilient global economic
and financial system. Much of this has to be globally coordinated, given the extensive
linkages among economies and the financial system.
In Asia, we face many policy challenges, and I will touch on three of these: managing the
recovery, economic restructuring, and the regulation and development of the financial
services sector. My main theme is that we must be cognizant that many Asian economies
enter this crisis with different starting conditions, and going forward, face different challenges
from those in advanced economies. Understanding these differences, and avoiding a
onesize-fits-all approach, will be critical to the design of policies appropriate to each country and
region.
Managing the economic recovery
First, the economy. The financial crisis hit Asia with unexpected speed and force. From peak
to trough, stock prices fell by more than 60% and a group of Asian economies contracted by
an average of about 6.2%, not far from the 8.3% fall during the Asian Crisis. Exports fell by
over 30%, and intra-Asian exports fell even more sharply, by over 48%. These are far worse
than even during the Asian Crisis. There was no de-coupling.
Just as the fall was swift and sharp, the initial rebound has been rapid and strong. One
quarter after the trough in the present cycle, Asia's GDP grew by 9.4% on a
quarter-onquarter basis, more than twice of the 4.3% rise after the Asian Crisis. Exports have also
rebounded swiftly, lifted in part by the sharp increase in shipments to China.
While the outlook has improved, the sustainability of the recovery is not clear at this point.
With this uncertainty, managing the cyclical recovery of Asian economies presents several
challenges. A withdrawal of government stimulus measures too early risks stifling the
recovery, while a withdrawal too late could result in inflationary conditions. A series of
carefully calibrated actions will be needed.
Moreover, many analysts and fund managers now hold the view that emerging economies,
while not de-coupled, will still grow significantly better than advanced economies for some
years to come. Hence, there has been a re-rating of assets in emerging economies. Coupled
with extremely accommodative monetary conditions globally, we can expect increasing inflow
of funds to many emerging economies, including those in Asia, in search of yields. Managing
this inflow so that it supports growth, and not drive excessive asset inflation, will be
challenging. Policymakers will need a variety of tools.
Economic restructuring in Asia
Beyond the immediate challenges, the second set of issues that Asian policymakers will
have to grapple with relates to the re-structuring of their economies. Business-as-usual policy
will not work. The world has enjoyed a positive supply-shock with the entry of emerging
economies into the global economy. We have had a period of Great Moderation. But this
supply shock also creates new competitive dynamics, which will drive changes in the
patterns of trade, production and growth in the coming years. The adjustments to these
changes will be neither easy nor smooth. As unemployment in some advanced economies
mount, the risk of trade and financial protectionism rises. Rapid changes in the real economy
will generate greater uncertainty, and potentially greater volatility in financial markets.
Over the next few years, Asia is likely to grow more slowly compared to pre-crisis days, when
external demand from advanced economies weakens. To sustain growth, Asian economies
with big domestic markets will need to continue with structural reforms to boost domestic
demand. Smaller Asian economies will have to re-orientate their economies to respond to
new opportunities in these markets. The cross-border production and supply-chain networks,
which have been so efficient in raising Asia's exports to the rest of the world, remains
valuable but will have to be increasingly re-orientated towards raising domestic and
intraAsian consumption of final goods and services. Measures to encourage new investments in
the corporate sector and in public infrastructure, as well as in education and healthcare, will
be necessary for most Asian emerging economies in order to realize their growth potential.
The basic outline of changes is well understood, but crafting the details of these changes,
and calibrating the pace of implementation, will need thoughtful work. The build up of
domestic demand would probably be a gradual process, as experiences of Japan and
Germany suggest that reducing a nation's export dependence involves major structural
changes that evolve over an extended period of time. Nevertheless, I am optimistic that Asia
will be able to respond to these challenges, to achieve its longer term growth potential and
contribute towards more sustainable global growth.
Financial regulations and development
Let me now turn to the third set of challenges: financial regulations and development.
Financial authorities are now working intensely in various fora, such as the Financial Stability
Board and Basel Committee, on regulatory reforms and cross-border cooperation. The major
themes relate to new capital and liquidity frameworks and linking these to systemic risks;
dealing with the moral hazard problem of individual institutions becoming "too big", or "too
connected" to fail; cross-border coordination and resolution regimes; redefining accounting
rules and building counter-cyclical buffers to address pro-cyclicality; adherence to global
standards and others. In many areas, measures have already been agreed and
implemented.
Many of these changes will be relevant to Asia, and we need to abide by global standards.
However, following the Asian Crisis, significant financial sector reform has taken place in
many parts of Asia. In many economies, the rules have become more conservative. For
instance, many jurisdictions here in Asia have strict loan-to-value ratios in mortgage loans
and provisioning requirements. There is therefore less need for Asia to have to make drastic
changes to meet the new norms.
In fact, Asia's bigger challenge lies less in having more stringent regulations, but more in
development and innovation of financial services to complement its economic development.
Saving rates in Asia are high, but these have to be efficiently intermediated to support
productive investments. In most parts of Asia, the banking system dominates the
intermediation channel.
Developing a stronger second channel through the capital markets, venture funds and
private equity to support a range of entrepreneurial activities can raise the efficiency and
resilience of the system. This will also provide a wider range of asset classes to meet the
investment needs of a rising middle class. Similarly, the insurance and risk management
markets will have to be developed further to meet corporate and individual needs. There is
already a momentum, with capital markets in China, India and ASEAN economies
developing well. In bigger economies, micro-finance, mobile finance and rural finance are
also being developed. Cross-border financial activities within Asia are also showing signs of
increase. These are positive changes, as the development of a deep and integrated financial
system provides a vital support for structural adjustments in the region.
Economic and financial linkages between France and Singapore
Let me now say a few words on how Singapore is responding to these challenges, and how
the French business and financial community can collaborate with those in Singapore to
promote growth in Asia.
The Singapore government has set up an Economic Strategies Committee to identify policy
changes to strengthen Singapore's value as a vibrant global economic node in the heart of
Asia. Singapore's connectivity enables it to facilitate the flow of goods, services, capital and
ideas. The value of Singapore as a stable, trusted hub that respects the rule of law, and its
value as a consistent regulatory regime are our core strengths. But these will need to be
enhanced with new capabilities in knowledge creation and innovation, as well as the
development of deeper talent pool, in order for the business community to seize new
opportunities.
The connectivity and ease of doing business is well acknowledged by global businesses.
Today, over 26,000 international companies use Singapore as a base for their operations.
Between France and Singapore, economic and trade ties are deep and growing. In 2008,
total trade between France and Singapore stood at more than eight billion Euros, making
Singapore the third largest Asian export market for France, after China and Japan. France,
on the other hand, is the sixth largest European investor in Singapore. Some 800 French
companies from a wide range of industries including petrochemicals, electronics,
telecommunications, aerospace, biomedical sciences, education, and luxury goods are
located in Singapore.
French financial institutions have a significant presence here. BNP Paribas is one of
Singapore's earlier Qualifying Full Banks. SocGen celebrated its 30th anniversary in
Singapore recently. Credit Agricole would count as the oldest French bank in Singapore,
through its acquisition of Indosuez which was set up more than a hundred years ago in
Singapore in 1905. Natexis has been here for 27 years, while CIC just celebrated its 25th
anniversary in Singapore this year. These institutions carry out significant banking and fund
management activities here. There are also insurance firms like AXA with a major presence
in Singapore.
We appreciate the contribution of French financial institutions. Mr Claude Bebear, Honorary
Chairman of AXA, was recently awarded the Public Service Star (Distinguished Friends of
Singapore) Medal during our 44th National Day celebration. Mr Bebear is the first
representative of the financial sector to receive such an award. This is a special award that
recognizes individuals who have contributed significantly to Singapore in business, industry,
technology and science.
I hope French financial institutions, with strengths in particular areas of finance, will continue
to find ways to serve investors, corporates and governments in the region. Your strengths in
Islamic finance, project finance, trade and structured finance are very relevant to Asia's
growing needs in building infrastructure, facilitating trade and developing enterprises. Asset
managers and insurance firms can serve the growing class of Asian investors, as well as
global investors who look towards Asia to grow their assets and diversify risks. We hope that
Singapore will continue to serve as a useful base for you to understand and serve the region,
and that you will find many valuable partners here.
In this regard, the close collaboration between Singapore and France in research and
education in the areas of finance and business will contribute to a deeper understanding of
the region. Last year, HEC Paris and the National University of Singapore celebrated their
10th year of collaboration. Two well-known institutions - INSEAD and ESSEC Business
School - have established their Asia campuses in Singapore. INSEAD has also set up the
Asia-Pacific Institute of Finance in Singapore to conduct regional executive education
programmes, as well as conduct Asia-specific financial research.
Financial institutions like AXA and BNP Paribus have also set up training and research
centres in Singapore. I understand that there is also well-established financial research
infrastructure under the ambit of Paris Europlace and the Europlace Institute of Finance. We
look forward to greater collaboration between French and Singapore institutions. In
particular, given the importance of risk management in finance, I hope that French
institutions specializing in this area can bring their expertise to this region.
Conclusion
In closing, the global financial crisis has presented many lessons for the financial community
and policymakers. In Asia, the crisis has accelerated structural reforms. There are many
challenges ahead, including the development of the financial services sector in appropriate
ways to support economic restructuring. I hope that financial institutions in France and
Singapore will contribute meaningfully to this development and help bring about a more
resilient and robust global economy.
I wish Paris Europlace every success in hosting this Forum, and look forward to many more
such exchanges in the future.