emerging economies experiencing currency appreciation. 5 as for sovereign risk, the unsustainable path of certain euro member countries ’ public debt has threatened the stability of the european monetary union ( emu ). the main reason is that banks and other financial institutions are substantial holders of the debt of troubled governments, and the associated default probabilities implicit in market debt prices are already too high and rising. for opposing views, see bernanke, b. s. ( 2005 ). “ the global saving glut and the u. s. current account deficit. ” remarks at the sandridge lecture, virginia association of economics, richmond, virginia, march 10 ; and, taylor, j. b. ( 2009 ). getting off track. hoover institution press. for example, mervyn king has warned that if an agreement on how to reduce imbalances is not reached, at best, there will be a weak recovery ; at worst, the seeds of the next financial crisis will be sown ; see king, m. ( 2011 ). “ global imbalances : the perspective of the bank of england ”, february. bis central bankers ’ speeches while there has likely been a negative effect from sovereign to systemic risk, one should not exclude causation in the other direction. among other factors, financial institutions took considerable exposure on the public debt from different countries because they rated all emu sovereign issuers virtually risk - free. apparently, they assumed that in case of difficulties, fiscally strong governments would bail out the weak ones, as it has been the case until now. policy measures in light of the limited knowledge about the possible taxonomies of systemic risk, economic policy has to be both preventive and reactive to problems. in both cases, it is preferable not to introduce additional uncertainty. hence, to the extent possible, it is advisable to rely on pre - announced rules rather than discretion. on the preemptive front, any design should begin by eliminating incentives for excessive risk taking that might stem from economic policy itself. once this is cleared, the regulatory framework should be strengthened to mitigate the built - in fragilities of the financial system and further align private incentives toward prudent risk taking. for individual intermediaries, stringent capitalization and liquidity requirements are necessary. also, as the crisis revealed, systemic risk is a super - additive phenomenon where the risk of the system is greater than the sum of risk of its parts. therefore,

is often higher expectation from the public for governments and central banks to shore up the economy, not to mention to deal with other structural issues and climate change. the second context is the return of politics and geopolitics to the forefront of policymaking. risks of further geoeconomic fragmentation and domestic political tensions make it even harder to collaborate both at home and abroad. in the short term, we already see trade restrictions around the globe tripled from around 1, 000 measures pre - covid to around 3, 000 in 2023, according to the imf. one of the consequences is that the two biggest economies slow down trade with each other [ 4. 2 % growth in 2016 – 2018 to 1. 9 % growth in 2019 – 2023 ] and shift to trade more with the rest of the world. this trend is also likely to continue into the future as foreign direct investment into asean grew by 40 % since 2017, leading by the us and china. in the medium term, increasing tariff and reshoring could further challenge the objective of low and sustainable inflation, while ongoing reconfiguration of investment and supply chain could make economies more prone to disruption. the third is rapid advancement in digital technologies that support payment innovation, new business model for financial services, and advances in ai that could be 2 / 7 bis - central bankers'speeches incorporated in many dimensions of banking. such advancement leads to opportunities and unprecedented level of cross - country collaborations, as reflected in digital currency projects and cross 98 border digital payments linkages, but they have also exposed us to risks such as faster and more sophisticated fraud, as well as digital divide. part 2 : challenges of small open economies / emes'central banks and what we do to overcome the challenges and be'future ready'all of these backdrops amplify old challenges and create new ones. i think there are primarily 3 challenges which this context presents to us. the first is that our task in ensuring macro - stability is much harder given limited policy space but higher expectation. the second challenge is to ensure the financial sector serves its purpose in allocating resources efficiently – with a pursuit to build a financial landscape that embraces innovation to help address legacy problems rather than worsening them. the last challenge is to reap benefits of technologies and innovations in building resiliency of the economy and addressing the risk of geopolitical fragmentation. [ challenge 1 : macro stability ] first, the changing context makes the job of ensuring both macroeconomic and