Most recently, the IMF, in its World Economic Outlook assessment of October 2008, forecasted that “The world economy is entering a major downturn in the face of the most dangerous financial shock in mature financial markets since the 1930s. Global growth is projected to slow substantially in 2008, and a modest recovery would only begin later in 2009. […] The immediate policy challenge is to stabilize financial conditions, while nursing economies through a period of slow activity and keeping inflation under control.” Nevertheless, there is also a positive development. Central banks and regulators around the world are now taking coordinated and concrete actions. Comprehensive measures aimed at restoring confidence in the banking systems include provision of liquidity, new capital injection, guarantee of interbank loans, blanket deposit guarantee, and government purchase of troubled assets. As for Thailand, despite the magnitude of the turmoil in the global financial market and the decline in local stock market, the immediate impact of the turmoil on Thailand’s banking system thus far has been limited. This is because the direct first-round impact linked to investment exposure of the Thai banking system is small. The indirect second-round impact via the downside risks to economic growth and financial market volatility, however, will be a challenge and will require vigilance on macroeconomic policy, as well as prudential measures, to ensure continued economic growth and financial stability. Let me cite some of the factors which have helped to keep the direct negative impacts limited. First, Thai banks have low direct exposure to problem assets.

This is perhaps the toughest challenge for emerging markets in this regard. In particular, a heavy focus on maintaining immediate financial and economic stability can often hinder efforts to deliver these very same goals in the long run. Thus, ensuring that the outcome of such trade-offs turn out favorable to the attainment of monetary and financial stability in the long term is perhaps the toughest challenge for emerging markets in the present context. Ladies and Gentlemen, To conclude, despite the challenges presented above, the overall direction of change in emerging market countries in the past decade is fundamentally reassuring. Much has been achieved in terms of strengthening the monetary framework and financial system development, reducing vulnerability to external shocks through the establishment of sizable foreign reserves cushion as well as significant restructuring of external debt currency denomination and maturity profile. These changes make it more likely that the process towards further global financial integration will bring substantial benefits in terms of growth and fewer risks, in terms of financial distress, and ultimately contribute towards a more stable macroeconomic outcome. And with that note, let me now end my lecture this evening. Thank you. References Aguiar, M. and G. Gopinath (2007), “Emerging Market Business Cycles: The Cycle Is the Trend”, Journal of Political Economy, Vol. 115, No. 1, pp. 69-102. Arbache, J. (2004), “Do Structural Reforms Always Succeed?” United Nations University Research Paper No. 2004/58. Bank for International Settlements.