The Relevance of SEACEN in a Turbulent World'
Honourable Governors, Deputy Governors, Managing Directors,
delegations from SEACEN central banks, distinguished experts, and
panellists, Dr. Mangal Goswami and the SEACEN team, and my

colleagues from the Reserve Bank of India.

I join previous speakers in expressing my gratitude to you all for your
participation in the rousing discussions that took place today. As this
conference draws to a close, I note with great satisfaction the richness
and depth of the insights provided in keynote and special addresses, and
in the panel discussions about the global economic outlook; the lessons
learnt from the fight against the recent worldwide surge in inflation; the
financial stability implications of monetary policy actions; and financial
inclusion and the role of digital public infrastructure. We live in challenging
times, with divergent pathways characterising our jurisdictions, but our
common commitment to macroeconomic and financial stability will shine

light on the way ahead.

There is broad consensus that the centre of gravity of the global economic
order is moving eastwards to Asia. The January 2024 update of the IMF's
World Economic Outlook upgrades the outlook for Asia's growth relative
to its October 2023 projections, rendering it the fastest growing region of
the world. This growth performance is expected to be underpinned by the
resilience of domestic drivers. Overall, Asia will likely contribute about two-
thirds of global growth in 2024, a carryover of its blockbuster performance

in 2023. Another noteworthy development is that disinflation is expected

' Closing remarks by Michael Debabrata Patra, Deputy Governor, Reserve Bank of India (RBI) at the
59" SEACEN Governors' Conference on February 15, 2024 at Mumbai. Valuable comments received
from Samir Ranjan Behera, Suvendu Pati, Dhirendra Gajbhiye, Rajat Malik, Saurabh Gangwal and
Gunjeet Kaur, and editorial help from Vineet Kumar Srivastava are gratefully acknowledged.

2 https://www.imf.org/en/Publications/WEO/Issues/2024/01/30/world-economic-outlook-update-
january-2024

to remain on track in Asia and convergence with central bank targets is
being sighted. Thus, the outlook for Asia in a stormy and unsettled global

environment is one of sustained growth with stability.

Within Asia, the group of nations served by SEACEN will likely be its main
engine of progress. This presents exciting opportunities as well as trials
and tribulations. According to a recent Suara SEACEN blog, the
challenges that our central banking community has flagged are changing
workforce demographics, the rise of financial products and services
beyond the conventional definition of banking, digitalisation, climate
change, talent shortages and persistent supply shocks, apart from the
pandemic and the recent inflation experience'. It is in this context that
SEACEN assumes importance as a supra-national public good committed
to building capacity and fostering networking and collaboration in our
region. Emboldened by its contributions, I would like to focus on the
economic transformation of the economies that have constituted the
SEACEN as the theme of my address.

Some Stylised Facts

The countries comprising the membership of SEACEN are home to 45
per cent of the world's population. The share of SEACEN economies in
the world economy - measured by the ratio of their combined gross
domestic product (GDP) to global output - has risen from 9 per cent at the
turn of the century to 27 per cent in 2023. In terms of purchasing power
parity (PPP), SEACEN members account for more than a third of global
GDP. In terms of per capita GDP at current prices, member countries
range from lower-middle income to high income categories, but a common

characteristic is that they are high saving economies barring a few

3 Future Proofing Central banks through Leadership Practices, posted on December 14, 2023 by
Donna Lumbo.

outliers*. On a PPP-weighted basis, the average saving rate of SEACEN
economies is estimated at 37 per cent of combined GDP, and the
weighted average investment rate is estimated at 36 per cent. While
bearing out the existence of the Feldstein-Horioka puzzle®, this is also
indicative of the predominant role of domestic resources in driving

investment and growth in the region®.

The SEACEN group of countries is also a power house of international
trade. It accounted for 31 per cent of world exports of merchandise in 2022
according to the World Trade Organisation (WTO), attesting to its
international competitiveness and its central position in global supply
chains. The SEACEN group also absorbs 28 per cent of world imports of
merchandise, thereby underscoring the vital role it plays in boosting net

global demand.

According to the United Nations, the SEACEN group region is expanding
its footprint in the frontline area of digital trade, estimated at US$ 3.9 trillion
globally in 2022. Although information on digital trade for each of the
member countries of the SEACEN is not uniformly available, it is
noteworthy that the Asia-Pacific region exported digitally deliverable
services valued at US$ 958 billion, representing 52 per cent of the region's
total services exports'. In fact, the digital landscape in each of our
economies has swelled in recent years, encompassing an array of
innovations from manufacturing automation to e-commerce platforms, all
the way to digital payments. Asia has led the installation of industrial

robots in recent years, spearheaded by members of the SEACEN.

4 Cambodia; Papua New Guinea.

5 Feldstein, Martin; Horioka, Charles (1980), "Domestic Saving and International Capital
Flows", Economic Journal, 90 (358): 314-329.

§ Data are drawn from the IMF's World Economic Outlook Database, October 2023.

7 "Unleashing Digital Trade and Investment for Sustainable Development", Asia-Pacific Trade and
Investment Report 2023/24, December 2023.

There are notable differences among the SEACEN member economies
too. Illustratively, gross general government debt to GDP ratios range
widely between 2 and 168 per cent, pointing to high variations in fiscal
stances, although the median ratio at 58 per cent compares favourably
with that of advanced (112.7 per cent) as well as emerging market and
middle-income economies (68.6 per cent)®. Similarly, external current
account balances range widely from deficits of above 10 per cent of GDP

to surpluses of close to 17 per cent®.

The region is also a preferred habitat for international financial flows to
which I shall come back shortly. Positive growth differentials vis-a-vis the
rest of the world, deep and vibrant financial markets and reasonable
stability in financial asset prices contribute to the relative attractiveness of
these economies in drawing capital flows. On the other hand, global
spillovers from geopolitical developments, geoeconomic fragmentation
and the tightening of financial conditions as a result of the aggressive and
synchronised monetary policy tightening worldwide have imposed
downward pressures on currencies in the region, resulting in widening of

risk spreads and reversals of portfolio equity and debt flows.

These stylised aspects of economic performance reflect the growing
economic heft of the SEACEN configuration and the locomotive of global
growth it is shaping up to become in the medium-term. Against this
backdrop, I will now turn to a few areas that have engaged policy attention
among SEACEN central banks in the recent period as seen through the

lens of valuable research undertaken at the SEACEN centre.

8 https://www.imf.org/external/datamapper/GGXWDG NGDP@WEO/OEMDC/ADVEC/WEOWORLD
9 IMF's WEO Database, October 2023.

Managing Capital Flows

Right from the establishment of the centre, SEACEN member central
banks have expressed an abiding interest in the management of volatile
capital flows, especially in mitigating risks to price and financial stability.
SEACEN central banks' successes in addressing these challenges are
now helping to forge a new consensus on appropriate risk analyses, policy
instruments and frameworks as well as proactive policy responses.

A recent book publication by the SEACEN Centre reveals interesting
insights into this experience'. Capital inflows to SEACEN member
economies have more than doubled from an average of around US$400
billion in 2000-2010 to over US$900 billion in 2011-2021. Multinational
enterprises (MNEs) have been prime movers in the form of within-
company credits reflected in FDI debt flows, trade credits and cross-
border bank deposits. The banking sector, the second largest recipient of
capital flows, is facing rising competition from non-bank financial
institutions (NBFls) in cross border financial intermediation. The period
2011 to 2021 also witnessed the significant rise of non-resident bond
issuances mostly by the public sector, marking a move towards market-
based finance. The volatility of capital inflows into SEACEN economies
declined between 2000-2010 and 2011-2021; however, the variability of
portfolio equity and trade credit and advances flows rose.

These evolving patterns highlight shifts in drivers and sectors and hence
the need for varied responses. Generally, SEACEN economies have
loosened capital flow measures (CFMs) while macroprudential measures

(MPMs) were mostly tightened.

10 "Challenges and Options in Managing Capital Flows for Small, Open, and Financially Integrated
Economies" (2023), The South East Asian Central Banks (SEACEN) Research and Training Centre.

Monetary Policy and the Cost of Disinflation

The conduct of monetary policy has been a subject of animated interest
in the SEACEN Centre and its membership, igniting a proliferation of work
on the theme. In 2022, the interest rate cycle turned after several years of
global accommodation and aggressive rate increases occurred in
response to the sharp and persistent rise in headline inflation. The aim
was also to prevent potential second round effects - most notably the
wage-price spiral - and from a SEACEN members' perspective, to stem
possible capital outflows due to the unparalleled increase in US interest
rates. During 2022 and 2023, most Asian economies reported higher than
envisaged inflation rates. A February 2023 Bangko Sentral ng Pilipinas
survey indicated that private households expected inflation to edge up
towards the upper limit of its inflation target't. In response, practically all
central banks in the region raised main refinancing rates, leading to tighter
financial conditions. Estimates at that time pointed to subdued GDP
growth forecasts, down from 5.5 per cent in 2022 to 4. 7 per cent in 20237.
A working paper from the SEACEN centre provides estimates of the
sacrifice ratio - the loss of output to achieve a reduction in inflation by one
percentage point - for select SEACEN member countries"*. For the region
as a whole, it estimates with several caveats that the cost of a one
percentage point reduction in headline inflation is between zero and 0.5
per cent of GDP. The extent of contraction in output was found to diverge
widely across the membership. A factor potentially affecting monetary
policies of member central banks was identified as the stance of US

monetary policy.

" Bangko Sentral ng Pilipinas. (2023). Business Expectations Survey. 2"4 Quarter 2023.

12 Asian Development Bank. (2022). Asian Development Outlook Supplement. December.

13 Dierks., L. H. (2023): "Inflation, Monetary Policy and the Sacrifice Ratio: The Case of Southeast Asia",
SEACEN Working Paper 01/2023.

Central Bank Digital Currencies

The growing interest in digital forms of payments worldwide has led
SEACEN central banks to explore the possibilities of central bank digital
currency (CBDC). Although still in various stages of experimentation in
different member countries, the central tendency seems to be a CBDC
design under a two-tier hierarchical structure implemented by using
public-key cryptography, with the central bank as the root certificate
authority for generating digital signatures, and other financial institutions
as intermediate certificate authorities. An important design feature is the
capability to create secure point-to-point online payments through the use
of authorised hardware. The overarching goal for developing CBDC as
digital cash among the SEACEN central banks appears to be to create a
resilient payment system for consumers and businesses to transact in any
situation.

SEACEN central banks are actively coordinating their efforts to develop
CBDCs, with near real time exchanges of information on progress. Bank
Indonesia is pushing ahead with trials of the digital Rupiah for wholesale
interbank settlement. The BIS led Project Dunbar involving the Central
Bank of Malaysia and the Monetary Authority of Singapore, has developed
two prototypes for a shared platform that could enable international
settlements using digital currencies issued by multiple central banks.
Bangko Sentral ng Pilipinas (BSP) announced in September 2023 that it
will use the Hyperledger Fabric blockchain for its first wholesale CBDC
trials under Project Agila. Singapore has started Project Ubin which is
aimed at solving challenges faced by the financial industry and the
blockchain ecosystem. In Sri Lanka, the central bank is working on a proof
of concept for its board before proceeding to a pilot. Thailand's Project

Inthanon aims to explore the potential of CBDC for interbank settlements.

South Korea will start a pilot for a CBDC involving 100,000 citizens in
2024. Cambodia launched Project Bakong, a blockchain-powered retail
payments system that allows interoperability among the different players
in the country's payments landscape by using a tokenized deposit system.
Hong Kong's pilot, which involves 16 banks and payment companies,
tested six potential uses of the e-HKD. India is conducting pilots in both
retail and wholesale segments. Myanmar, Lao PDR, Nepal and Vietnam

are in various stages of research.
Big Data Applications

To quote Dr. Mangal Goswami in his eloquent foreword to the survey on
Big Data Applications in Monetary Policy and Financial Stability for
SEACEN Member Economies: The Case of Indonesia" as part of the
SEACEN centre's research project, the use of big data and the associated
data analytical techniques is inexorably moving forward in central banking,
including in many SEACEN member central banks and monetary
authorities. Asian central banks, he pointed out, are some of the most
enthusiastic adopters of big data and the associated analytical toolkit such
as natural language processing, nowcasting/monitoring exercises and
applications to extract economy insights as well as suptech/regtech
solutions.

Machine learning has also been used extensively in Asia for research
purposes to inform monetary policy decisions, facilitate data management
and support regulatory supervision. Dr. Goswami does well to cite the
challenges that come along with the analytical opportunities of big data,

namely, data management and governance, high upfront costs, legal

'4 Bank Indonesia. (2023): "Big Data Applications in Monetary Policy and Financial Stability for
SEACEN Member Economies: The Case of Bank Indonesia', SEACEN, July.

issues around privacy, the adequacy of the IT infrastructure and most
importantly, the necessary human capital. Moreover, big data creation has
migrated from the public sector to the private sector, bring in issues
relating to data sharing and communication challenges.

According to the 2020 Irving Fisher Committee on Central Bank Statistics
survey'®:'® to which most of SEACEN members contribute, the share of
central banks and supervisory authorities adopting big data and machine
learning has risen to 86 per cent in Asia, involving nowcasting exercises,
applications to granular financial data, and suptech/regtech applications.
The survey cites the computation of the economic policy uncertainty
(EPU) indices in India. Other applications in Asian central banks include
using text analysis to: i) evaluate monetary policy credibility; ii) ensure
consistency in central banks' communication of supervisory issues to
financial institutions; iii) improve efficiency in the compilation of statistics;
iv) assess the state of the labor market or of trade conditions; v) extract
information on tourism activities; and vi) capture firms' sentiment or
evaluate employees' feedback. Another important area relates to fraud
detection - one third of surveyed Asian central banks deploy big data
algorithms for anti-money laundering/combating the financing of terrorism
(AML/CFT) purposes.

Climate Change

Climate change poses a common and potentially overwhelming macro-
financial risk for all SEACEN member countries. The alarming rise in the

incidence and intensity of extreme weather events in our region in recent

'5 Bank for International Settlement (2021). Irving Fischer Committee on Central Bank Statistics: 2020
IFC Annual Report. January.

16 Cornelli, G; Doerr, S; Gambacorta, L & Tissot, B (2022): "Big Data in Asian Central Banks". Bank
for International Settlements. IFC Working Papers. No 21. February.

years relative to the historical record is causing large agricultural losses,
threats to transport infrastructure, risks to manufacturing supply chains,
tourism and exports and translating into credit risks for banks as well as
tightening of financial conditions.

For instance, the results of a structural vector autoregression panel
analysis conducted in 2022 at a SEACEN Centre-National Bank of
Cambodia-IMF STI seminar' estimates that risk premium on account of
climate vulnerability in sovereign bond yields in the south East Asian
region is as much as 155 basis points as compared with 113 basis points
for other EMEs (other than high risk ones). Impulse responses show that
bond yields rise in response to a climate shock and the shock becomes

permanent after 12 quarters.

Conclusion

56 years ago, Gunnar Myrdal, winner of the Nobel prize for economics in
1974, made a Malthusian prophecy of stunted economic growth in Asia in
his magnum opus Asian Drama: An Inquiry into the Poverty of
Nations. \In his words: "...countries are in constant danger of not being
able to lift themselves out of stagnation or even of losing ground as far as
average income levels are concerned.""®

The preface of the Asian drama starts with the words habent sua fata
libelli - books have their own destiny; but as Asia has shown, economic
development too has a life and rhythm of its own. Over the last three
decades and looking ahead, the dramatic rise of Asia has proved Asian

Drama wrong. Macroeconomic performance of the region is standing out

'7 Details of the seminar are accessible at:
https://www.imf.org/en/News/Seminars/Conferences/2022/12/01/120522-seacen-imf-sti-high-level-
seminar-on-policy-challenges-and-peer-learning-event-on-climate

18 Myrdal, Gunnar (1968). Asian Drama: An Inquiry into the Poverty of Nations". New York: Twentieth
Century Fund Study, Pantheon.

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in a world that is expected to experience its slowest growth in three
decades, according to the World Bank. The membership of SEACEN is at
the forefront of this transformation and their central banks are leading the
way forward.

Thank you for your patience.

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