For some economies that were more affected by the recent financial market turmoil, they have also taken credible policies to address domestic imbalances and have been successful in restoring investors’ confidence so far. Nevertheless, we cannot afford to be complacent as what we had experienced in the past year was probably a prelude to, rather than the end of, a period of heightened market volatility. The sentiment of global financial markets has turned more sanguine recently amid expectation of prolonged low interest rates in the US. However, the pace of monetary normalisation in the US is very much uncertain and data dependent. With a large part of the cumulated capital inflows to Asia since 2009 still in the region, it is possible that regional economies with domestic vulnerabilities built up during the period of ultra-loose global monetary conditions could experience sharp corrections when capital flows ultimately reverse. It is therefore imperative that regional economies should make use of the current breathing space to put their own house in order, take credible measures to reduce macroeconomic and financial imbalances, step up surveillance and ready contingency plans and liquidity backstops such as the use of foreign reserves and bilateral/multilateral swap lines to mitigate systemic risk in the financial systems when the need arises. A sharp reversal of capital flows could deal a severe blow to low-income countries, as reduced private capital, exports and remittance could have a disproportionally large impact on their less diversified economic structure.

While intra-regional trade has been growing fast, a further reduction in trade barriers should help promote deeper regional trade integration and facilitate more efficient resources allocation. A wider use of local currencies in trade settlement and financing would also help diversify sources of trade financing and reduce currency risk and transaction costs. Lastly, regional economies need to deepen financial market reforms and promote greater financial integration within the region to better channel Asia’s surplus savings to meet its own investment needs; to support growing trade integration; and to enhance the absorptive capacity of our financial markets to capital flows. Further liberalisation of the financial sector and improving financial infrastructure such as establishing credit information sharing system and microfinance institutions should also help some regional economies to allocate credits more efficiently. Over the years, ADB has contributed to financial sector development in the region through its own programmes and through supporting regional initiatives such as the Asian Bond Markets Initiative under ASEAN+3, and we welcome the Bank’s continued commitment in this regard going forward. It is noted that a number of the above structural reform areas have been identified as strategic priorities in the Bank’s midterm review of Strategy 2020. With its expertise, we believe ADB has an important role to play in helping the region to tackle the challenges arising from the highly uncertain global environment, and embark on structural reforms to raise its long-term growth potential.