Fiscal deficits in emerging Asia are 2–3% of GDP.   The debt burden is low. Public sector debt ranges from about 25% to 55% of GDP. External debt is about 30% of GDP.   Official foreign reserves are healthy.   The banks are well-capitalised. The 25 largest Asian banks comfortably meet Basel III Tier 1 capital adequacy ratios.   Governance is stronger. Stronger regulatory frameworks and corporate governance reforms following the Asian financial crisis in 1998 have improved the resilience of the financial and corporate sectors.   There is policy flexibility on the fiscal, and to some extent, monetary fronts, in the event global growth slips more than expected. Notwithstanding emerging Asia’s strong fundamentals, there is no room for complacency. The region is not without significant challenges which, if unaddressed, will prevent it from realising its potential and render it more vulnerable to shocks from the advanced economies. Let me highlight three medium-term imperatives for emerging Asia. Increasing domestic demand First, Asia must increase domestic demand. As growth slows in the advanced economies, it is in the region’s interest to reduce reliance on external demand and develop indigenous sources of growth. This will help to strengthen and stabilise Asian economies over the longer term. If an increase in domestic demand in Asia is complemented by fiscal consolidation in the key industralised economies, a longer term rebalancing of global demand could be achieved. 2  BIS central bankers’ speeches  Demographic factors will work to increase domestic demand in Asia.

The enhanced depth of the Islamic financial markets has also increased its attractiveness as an asset class for investment. These developments have resulted in an extensive range of Islamic financial products and services that is being offered to consumers and businesses. The third dimension in which there has been significant evolution is in the regulatory and legal framework for Islamic finance which has taken into account the distinct features of Islamic financial transactions. This has ensured that the growth and developments of Islamic  BIS Review 23/2008  1  finance is accompanied by the corresponding development of the supporting legal, regulatory and supervisory framework to ensure its soundness and stability. The establishment of the Islamic Financial Services Board in 2002 also marked an important milestone in the development of the prudential regulatory standards and best practices for Islamic financial institutions. Its establishment has also contributed to the harmonisation in the development of Islamic finance across different jurisdictions. Fourthly, the international dimension of Islamic finance has rapidly gained significance as it evolves to become an increasingly important part of the international financial system, and as is becomes poised to contribute towards greater global financial integration. Islamic financial institutions have now ventured beyond their domestic borders and funds raised in Islamic financial markets in different jurisdictions have drawn investors from financial centres across the globe. As market players across continents participate in the expansion of interregional investment flows, it has enhanced financial linkages among the major regions.