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.

European governments have begun to take steps towards fiscal consolidation, and must convince markets that these steps are credible. Unfortunately, the private sector is not ready to take over the slack in public demand. Private sector debt-to-GDP ratios exceed 250% in the G3 economies. In the United States, where the household debt-to-disposable income ratio reached an unprecedented 135% in 2008, deleveraging is already underway with the recovery in private consumption well below historical rebounds. While Eurozone households are less leveraged than US households, disposable income is likely to grow more slowly in the Eurozone and hence be a bigger drag on consumption. A third source of deleveraging is the banking system. Banks in the Eurozone have to strengthen their capital adequacy position to meet new regulatory requirements as well as buffer against potential losses on their sovereign debt holdings. With uncertain prospects for raising fresh capital in equity markets and facing funding shortages in wholesale markets, some of them are looking to scale back their risk-weighted assets. The resultant crunch in credit could further exacerbate the slowdown in the economy. With governments, households, and banks all having to deleverage at the same time, we are looking at a prolonged period of sub-par growth in the advanced economies. In many advanced countries, debt-to-GDP ratios are not expected to stabilise until 2015 to 2020. BIS central bankers’ speeches  1  Asia: neither decoupled nor derailed What does deleveraging in the G3 mean for Asia? Asia is not immune to developments in America or Europe.