Zeti Akhtar Aziz: Asian money, bonds and derivatives in the new global
economy
Keynote address by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the
13th Annual Conference of Fixed Income, Money Market and Derivatives Association of India
(FIMMDA) and Primary Dealers Association of India (PDAI), Kuala Lumpur, 27 January 2012.
* * *
It has been more than half a decade since the beginning of the global financial crisis, and its
ramifications continue to reverberate across the world. Currently, the global financial and
economic landscape continues to be confronted with stress and uncertainty, stemming from
the prevailing structural weaknesses, deleveraging of the private financial and non-financial
sectors, and the escalating strains in public finances in the advanced economies. Despite
these significant near-term challenges, the fundamental global economic and financial
transformation that commenced prior to the crisis has continued unabated. A new global
economy is emerging. The rise in significance of the emerging economies is resulting in a
fundamental realignment in the global landscape as the balance of global economic strength
shifts to the emerging economies, with its consequent implications on long-term global
economic and financial flows. With the rapid growth in domestic demand, reinforced by the
vast productive investment opportunities within and across the emerging economies, it is
projected that the emerging world will account for 60 percent of total world output by 2030,
higher by 20 percent from its current level.
It is my pleasure to welcome you to Malaysia for this 13th Annual Conference that is being
organised by the Fixed Income, Money Market and Derivatives Association of India and the
Primary Dealers Association of India. We are most pleased to host this conference here in
Kuala Lumpur. The theme of this conference, "Asian Money, Bonds and Derivatives in the
New Global Economy", is a relevant topic to be discussed in this period of transition to an
increasingly multipolar world, in which Asia together with other emerging regions will have an
increasingly more important role.
Asia's potential and regional integration
While this recent global financial crisis has provided us with challenges, it has also seen the
resilience of Asia in weathering a number of major shocks in the international financial
markets. Asian financial systems have demonstrated the capacity to continue to function and
to meet the demands of its significant investment requirements. Moreover, the trend towards
greater regional financial integration will provide for a more effective and efficient channeling
of the sizeable surplus funds to such activities within the region. This increased intra-regional
economic and financial activities is already taking place. The economic integration is
supported by the strong demand from the growing middle class Asian population, which is
projected to reach 3.3 billion by 2030. The intra-regional trade in Asia now represents more
than 50 percent of total trade in the region, increasing from 32 percent in 1995. Intra-regional
investment activities have also been on a rising trend.
With the strong economic fundamentals and the positive growth prospects of Asia,
international and regional financial institutions are also now shifting their focus into the
region. With the high savings rate in Asia, and of its massive requirement for infrastructure
development, the region would benefit significantly from more effective and efficient
intermediation of Asia's surplus funds. Indeed, intra-regional cross-border portfolio
investments have already increased to 28 percent of total assets holdings in 2011 compared
with 21 percent in 2001. The gains from greater regional financial integration will be
farreaching as it will not only bring about a more efficient allocation of resources in the region
but it will act as a catalyst for greater regional economic growth. Over the coming years, as
growth experienced in the developed economies is expected to remain slow in the aftermath
of the financial and debt crisis, the growth performance of Asia is expected to continue
resulting in the region becoming a more important component of the global economy.
Asian funding markets have also remained highly accessible during this period with Asian
names enjoying strong demand and attractive funding costs at a time when the developed
countries funding markets have tightened. During this more challenging time, Asian
sovereigns such as Indonesia, Philippines, Thailand, Sri Lanka, Vietnam and Malaysia
continue to successfully tap the market and to issue bonds with tenure up to 30-years. In
addition, as financial markets in Asia become more developed, the markets now have the
capacity to transact large quantities with cost effective pricing. In 2011, Malaysia issued the
first 10 year global sovereign USD Sukuk, with the issuance size of 2 billion, under an
innovative Shariah principle of Wakala which recorded the lowest absolute yields achieved
by an Asian sovereign for a new USD issuance. Another recent landmark issuance on the
domestic front is by PLUS Berhad, the largest toll operator in Malaysia, with the issuance of
a record size of RM30.6 billion programme, equivalent to USD9.7 billion, with maturities
ranging from 5 years to 27 years.
The depth and breadth of Asian capital markets have drawn investors to expand their
investment activities to this region. Even central banks, as traditionally conservative
investors, are also venturing into investing part of their reserves, in each other's markets.
Bank Negara Malaysia, has since 2003, gradually embarked on investments in regional
markets. This includes investments in the Indian rupee market. As an approved Foreign
Institutional Investor, we have also been able to actively participate in the Indian rupee
market.
Progression in the Malaysian financial markets
Progressive efforts have been made to transform Malaysia's financial sector with a major
dimension of the transformation involving achieving greater regional integration. Following a
decade, institutional and financial infrastructure development that focused on enhancing
domestic capacity of the financial sector while evolving a more competitive environment. We
have the foundations to take our financial sector to a new level of development that will focus
on new areas that will further strengthen the competitiveness and efficiency of the financial
sector and its potential role in facilitating Malaysia's ongoing economic transformation and in
strengthening our linkages in the region.
As Malaysia evolves and the new financial landscape emerges, one prominent area of focus
is the development of deep, liquid and efficient financial markets in particular, the
development of our domestic bond market. Malaysia's bond market has already grown to
MYR867 billion or 105 percent of GDP in 2011, and has become one of the largest debt
securities market in South East Asia which has now been liberalized to allow issuance by
foreign corporation and in multiple currency. Our Islamic capital markets have also thrived,
with a growing presence of international issuers and investors operating in both the ringgit
and foreign currency sukuk markets in Malaysia. We have seen new innovative structures for
sukuk issuances including a world's first issuance in Renminbi from Malaysia's own
sovereign wealth fund, Khazanah Holdings. The money and foreign exchange markets also
continue to grow in depth and liquidity. The volumes transacted in the domestic money
market and the foreign exchange market have now reached RM23.5 trillion and
RM9.21 trillion trades respectively. Participation in these markets have also broadened
significantly with the growing presence of new issuers, banks, institutions and investors in
general, including a growing presence of regional players.
In moving forward, measures will continue to be introduced to broaden further the
participation of regional players in the domestic market through progressive liberalization of
the foreign exchange administration rules and also the development of cross-border
settlement infrastructures to enable more efficient and cost effective foreign currency trading
and settlements.
Arrangements supporting the regional integration process
The region has more recently worked collectively towards establishing arrangements to
support the economic and financial integration process. In particular, the ASEAN region has
already benefited from the implementation of the ASEAN Free Trade Area (FTA), which was
established to increase ASEAN's competitive edge as a production base in the world market
through the elimination of trade barriers within ASEAN. This is now further strengthened with
the implementation of the ASEAN Investment Area which was adopted to promote greater
flows of capital, skilled labour and technology within the region. In the area of financial
markets, the ASEAN Capital Markets Forum Blueprint is also working towards achieving
significant progress in building a regionally integrated market. This vision encapsulates free
movements of capital, freedom for issuers to raise capital anywhere and for investors to have
access to investment avenues anywhere within the region. In such a market, investors would
be able to trade in ASEAN capital market products freely in any ASEAN market at a
competitive fee from a single access point, with capital market intermediaries being able to
provide services throughout ASEAN. The strong cross-border linkages of an integrated
ASEAN capital market provide vast business opportunities for countries to capitalize on the
diverse comparative advantages in this region.
As an access point, Malaysia is well positioned to be one of the gateways for non-ASEAN
countries, institutions and investors to participate in these markets. Malaysia has a facilitative
environment with a strong regulatory and supervision to support business activities while
safeguarding financial stability. In addition, there has also been the strengthening of bilateral
economic and financial ties, which has become a prevalent theme across Asia.
Supplementary to these affiliations, is also a strong trend to increase participation in Asia's
enormous growth potential through affiliations in regional bodies. Within the ASEAN grouping,
among the areas of priority is the deepening of cooperation to accelerate the role of the
financial sector in supporting the realization of the ASEAN Economic Community by 2015.
Risk mitigation as Asia strives for regional integration
The events surrounding the recent European sovereign debt crisis provide us with many
important lessons. While exposures to numerous financial markets bring about tremendous
economical and financial benefits, it is not without risks. Financial integration between
markets, if not well designed, can lead to costly financial implications. Hence, the path to
integration can expect its associated challenges that will need to be addressed. In
implementing institutional arrangements across the region, it can be expected that individual
countries will have to balance national priorities while seeking to strengthen their place in the
global market.
Asia has therefore adopted a different approach to regional integration. The effort towards
integration is from the perspective of strengthening economic and business ties,
complemented by strengthening the resilience and stability of the financial sector. Towards
this, regional surveillance mechanisms are being put in place reinforced by financial support
facilities and an integrated framework for crisis resolution. Various forums among regulators
and central banks are already in place across most of Asia to collectively enhance crisis
management. Such fora also serves as financial safety nets across the region to ensure that
the financial institutions operating in this region will be able to withstand the destabilizing
spill-over effects of a global financial crisis in an orderly manner. Malaysia is already
implementing such arrangements, with swap agreements and cross border collateral
arrangements that will serve as an alternative avenue for banks operating in Malaysia and
the region to obtain liquidity for their efficient functioning including during challenging times.
Bilateral arrangements that are now being entered into will allow for the acceptance of each
others' currency and securities as collateral.
Strengthening economic and financial ties with India
The potential for collaboration between India and Malaysia is tremendous. Historic and
cultural ties originate many years back and form a strong foundation for the relations to be
strengthened going forward. Currently, Malaysia's exports to India has amounted close to
USD9 billion in 2011, equivalent to 4.1 percent of Malaysia's total exports, while the
outstanding direct investments from India is now close to half a billion USD. The financial
sector has an important role to be a catalyst to facilitate growth in such trade and investment
activities between India and Malaysia. The establishment of our relationship has already
begun with the issuance of a full commercial banking license to an Indian bank to operate
here in Malaysia in 2010. A licence has also been granted to an Indian fund manager.
Rise of islamic finance in the new global economy
Another development in several emerging economies in Asia and the Middle East is the rapid
growth of Islamic finance. An important development in this decade has been the growing
significance of the international dimension of Islamic finance and its increased role in
mobilising and channeling funds to productive investment activities across borders.
Expanding steadily at a double digit pace of growth, total Islamic financial assets currently is
estimated to be more than US$1 trillion. With more than 600 Islamic financial institutions now
operating in more than 75 countries, countries from Asia, Middle East and Africa are
increasingly participating in cross-border financial markets. In financing trade and investment
activities, Islamic finance has influenced a new global pattern of trade and financial flows.
Islamic finance serves as an important channel for more efficient allocation of funds across
borders and diversification of risks. It has facilitated stronger financial and economic ties
between Asia and Middle East. The sukuk market in particular, has become an important
avenue for international fund raising and investment activities that generate significant
crossborder flows. The sukuk market has experienced tremendous growth in the recent few years
from an outstanding amount of USD33 billion in 2006 to USD180 billion as at end 2011.
Malaysia is now evolving to become a major multi-currency bond and sukuk market.
Important in this development are the initiatives that have been taken to strengthen the
institutional and international infrastructure of Islamic finance. Most important is the emphasis
being given to the development of the international financial infrastructure relating to financial
stability. The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI)
was established in 1990 and in 2002, the Islamic Financial Services Board (IFSB) was
established as the international prudential standard setting body for the Islamic finance
industry in the areas of risk management, capital adequacy, governance, conduct of
business and supervisory process. From ten members at its inception, the IFSB is now a
189 strong member institution comprising mainly regulatory and supervisory authorities.
A more recent initiative is the establishment of the Islamic Financial Stability Forum (IFSF) as
a platform for greater engagement between the regulatory authorities in the Islamic financial
system and promoting more effective cross-border cooperation.
Efforts now is focused on putting in place arrangements for enhancing liquidity management
in the Islamic financial system. The International Islamic Liquidity Management Corporation
(IILM) was therefore established in 2010 as a collaborative effort between 12 central banks
and two multilateral organizations to facilitate effective liquidity management solutions
through the periodic issuance of short-term Shariah-compliant financial instruments.
Let me now conclude my remarks. This decade has been a defining moment for Asia,
characterized by rapid global expansion and increased internationalisation. Among the
important trends are the significant actions taken by many emerging economies in Asia
towards increased liberalisation as well initiatives toward strengthening of cross-border
linkages. Moving forward, it is essential for us to continue to establish strong collaboration
given the dynamic nature of the economies and financial markets today. As the new decade
beckons the prospects for new opportunities, our ability to capitalize on these opportunities
and realize its potential will be increasingly determined by our capability and capacity in
building such strong and lasting regional and global linkages.
Thank you.