The inter-connectedness of global financial markets and capital flows has been amply demonstrated. The resilience and current strong economic growth in Asia have therefore to battle against the strong headwinds and challenges from the global financial landscape. The sub-prime-triggered credit turbulence has, undoubtedly, created a lot of uncertainty. The adverse impact of the potential slowdown in the US economy is likely to be felt in Asia as the region’s economies are generally export-oriented. Large and volatile capital flows into the region have also placed pressures on exchange rates. This has posed risks of inflationary pressures, intensified by the recent high oil and food prices, spilling over into the Asian bond markets. Hence, it is crucial for regulators in the region to remain vigilant and to continue to control the risks that accompany the surging capital inflows while managing the currency and monetary conditions. Nonetheless, amidst this financial market turmoil, Asia’s resilience has thus far demonstrated its ability to weather the turbulence. Apart from Asia’s relatively limited exposure to sub-prime mortgages and related collateralized debt obligations (CDOs), the region’s strong economic growth and large liquidity pool, stimulated by the significant momentum coming from the domestic demand of China and India, and increasingly ASEAN, have cushioned the blow. Some may suggest that 2008 will be a difficult year for the credit markets and investors, especially those with weak credit profiles or the highly leveraged ones, may even divert exposures from equity and currency markets. However, the Asian bond market prospects, in my opinion, are not without bright spots.

Following the crisis, the Asian governments strengthened the macroeconomic fundamentals and put in place structural and fiscal reforms. The strong economic development in China and, then, India also helped to propel the region ahead. Today, the Asian economies growth rate averages around 8%. Businesses have repaired their balance sheets and have started to invest again after purging out the excesses of the 1990s. This is reflected in the Asia (ex-Japan) domestic bond markets, with a significant increase of almost five times in size from $ billion to more than $ trillion; far exceeding the global growth rate, which has doubled since 1997. Having said that, the global financial markets today are facing yet another crisis. Ten years ago, Asia was at the centre of the storm. However, this time round, the financial market turbulence started in the US and Europe and then spread throughout the world. The challenges facing the capital markets show that the banking system is intertwined with the capital markets more intricately than was previously believed. While the characteristics of the two financial crises are different, let me share 3 common themes that run through both crises. The first has to do with the tendency of the market to assume that current market conditions can be extrapolated into the long term. Before the Asian financial crisis, most investors extrapolated the rapid growth in Asia and the currency pegs maintained by some countries without factoring in the sustainability of such trends.