ravi menon : asia – no room for complacency keynote address by mr ravi menon, managing director of the monetary authority of singapore, at the paris europlace financial forum, singapore, 30 november 2011. * * * mr christian noyer, governor of banque de france, distinguished guests, ladies and gentlemen, good morning. for those of you who are coming from abroad, a warm welcome to singapore. deleveraging out of a debt overhang moliere, a french playwright considered to be one of the greatest masters of comedy, once offered this sobering thought : “ debts are like children ; begot with pleasure and brought forth in pain ”. today, the pain he described is palpitating throughout the world and keeping many leaders in government, business, and finance awake at night. the advanced economies are awash in debt. governments, households, and banks must reduce leverage to restore economic and financial sustainability. but history tells us that deleveraging, while necessary, leads to a prolonged period of slower growth punctuated by increased financial market volatility. the gross government debt - to - gdp ratio is 80 % in the uk and in the eurozone, 100 % in the united states, and 230 % in japan. sovereign debt in aggregate is today at levels not seen since the second world war. financial markets, which had hitherto tolerated the build - up in debt, have turned merciless against the eurozone economies, driving up sovereign spreads and dragging down the ratings of those who hold sovereign paper. 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

yielding asian assets. advanced economies represent half of global gdp but three - quarters of global market capitalisation in equity markets. a reallocation of just 5 % of advanced economy equity portfolios to emerging economies translates into a potential flow of us $ 2 trillion per year. so, the phenomenon of large capital inflows into asia is here to stay and we should learn how to handle it. large capital inflows pose two risks. first, these flows can potentially overwhelm asia ’ s ability to channel them to productive use, and create asset market bubbles – especially in real estate. residential property prices in some asian markets have increased by more than 50 % since 2009, outpacing income growth. to be sure, there are underlying structural factors supporting housing demand, such as urbanisation, growing populations, and the rise of the middle class. but surplus liquidity and rapid credit expansion fuelled by low global interest rates and large capital inflows have exacerbated asset price inflation in asia. the unwinding of asset bubbles can be rapid and extremely unpleasant. second, large capital inflows can turn into sudden outflows. sharp capital flow reversals can cause exchange rates to weaken, trigger panic in funding markets, and even result in destructive wealth effects. the unwinding of long positions in asian markets as global investors sought to de - risk their portfolios was partly responsible for the sharp selloff in many asian currencies in recent months. the most effective way to manage capital inflows is to allow interest rates or exchange rates to go up so that capital is priced appropriately. indeed, as emerging asia continues to grow, allowing the exchange rate to steadily appreciate over the medium term is vital to ensuring that capital inflows are moderated and allocated to productive investments. but interest rates and exchange rates cannot shoulder entirely the burden of adjustment to large and volatile capital flows. asian countries have been experimenting the use of so - called macroprudential tools to complement the more traditional macroeconomic tools in dealing with capital flows and asset price inflation. these include the use of loan - to - value ratios, taxes and stamp duties on asset market transactions, and minimum holding periods for assets, all of which serve to dampen demand for domestic assets. asia needs to continue refining these tools, learning from experience and adapting to different circumstances. deepening and broadening financial markets third, asia must deepen and broaden its financial markets. asia must do a better job