In the previous decade, during a period of relative stability, Asia had focused on building and solidifying our financial system. Deep, diverse and progressive financial systems have contributed significantly to increasing the resilience of our economies. Looking ahead, the next phase of Asia’s transformation will see a rising and more affluent middle income population. There will also be massive investments required for infrastructure and development and for a higher contribution to growth by small and medium businesses. This will substantially increase demand for a wider spectrum of high quality financial products and services. The strategy is also for the intensification of financial deepening in Asia to meet the increased demands of domestic investors in the management of their surplus funds. A large part of Asian funds are still intermediated through the global financial markets and then recycled back into Asia. This increases Asia’s exposures to volatile capital flows. To reduce the existing gap between the supply of and demand for financial assets within Asia, it will require the development of a vibrant risk capital ecosystem comprising intermediaries, financial markets and the supporting financial infrastructure to facilitate the efficient allocation of savings to productive investments. Second is the strengthening of financial linkages and connectivity, within the Asian region, and between Asia and other economies including other emerging economies. Asia has reached the stage of development where its further advancement calls for deeper regional integration that will result in greater capital mobility across borders, facilitated by more interconnected financial systems.

Enhanced coordination can also provide increased clarity on the direction of policy and reduce overreactions by the market while boosting confidence in prospects for the policies to achieve their intended outcomes. Strong fundamentals in Asia will continue to support our prospects in this more challenging environment. Following the Asian financial crisis, several emerging economies in Asia have strengthened their economic and financial fundamentals, improved their fiscal and external debt positions, and reformed their banking sectors. This has yielded tremendous payoffs. It has supported our economies to withstand the effects during this recent global financial crisis. Structural adjustments to diversify our economic structure and sources of growth have been an important part of this resilience. Asia also continues to have considerable policy flexibility to respond to external and domestic developments, although a prolonged delay in the recovery in the advanced economies will erode this policy flexibility in the future. Part 2 Asia’s development agenda also forms a key part of the efforts to firmly anchor our future growth. Several imperatives in the development of the financial sector are key in enhancing and maintaining both growth and stability in our region. First, is the further financial deepening in the Asian economies through the development of market-based and diversified channels of intermediation to support the region’s economic transformation. Since the Asian financial crisis, Asia has already made significant progress in this direction, in particular, in the progress and growth of the capital markets. Across Asia, the development of the financial system also continues to be pursued with vigor.