muhammad bin ibrahim : recent developments and emerging trends in asia keynote address by mr muhammad bin ibrahim, deputy governor of the central bank of malaysia, at the second annual south east asian institutional investment summit – “ recent developments and emerging trends in asia ”, kuala lumpur, 2 december 2010. * * * let me first thank asian investor for the invitation to speak at this institutional investment forum. i am honoured to be given the opportunity to speak before such a distinguished group of investors, fund managers and government officials at this important gathering. my remarks will consist of three parts – the first part, on the current trend of rising capital inflows to asia and its implications, secondly on regional market developments and lastly, i will make some observations on the region ’ s institutional and central bank investing space. asia as the investment destination and its implications it has been three years since the financial crisis first erupted. emerging market economies have demonstrated resilience, showing a steady growth path to recovery, well ahead of major developed countries which face challenges of low growth, high unemployment and mounting fiscal burdens. such large disparities in the growth rates and economic environment have inevitably led to divergence in monetary and fiscal policies. where developed countries had maintained low interest rates, expanded quantitative easing policies and implemented stimulus programmes to revive their economies, emerging markets had started normalising their interest rate policies. the recent financial crisis differed from the 1997 – 98 crisis in many aspects. emerging market countries have a much stronger fundamentals, better growth prospect and higher interest rates. these differences in fundamentals have attracted growing and significant capital flows to these parts of the world. net private capital flows into emerging markets was projected by the institute of international finance to rise to usd825 billion by the end of 2010, representing a 42 % increase from last year. many analysts expect the recent federal reserve ’ s policy decision to purchase another usd600 billion of us treasury bonds under “ qe2 ” will intensify further flows to the region. economists estimated that between a quarter to half of the qe2 liquidity will flood into emerging markets. the inflows if not managed properly will pose difficulties to asian and emerging markets. policymakers would face several predicaments from policy perspectives. the influx of capital inflows, have led to a rapid expansion of liquidity translating into rising prices, leading to concerns on asset bubbles and the possibility of overheating the economy. however, the impact on each economy will differ depending on the

together more than 30 central banks and supervisory authorities. the aims of this network include analysis of supervisory practices, of macroeconomic and financial risks, and the means for smoothing financing for the transition to a sustainable economy. undeniably, the implementation of all these aspects with some degree of harmonisation will be a difficult task. but you will agree with me that we are all facing a fundamental challenge and that, as such, we must spare no effort. allow me to refer briefly also to the role financial markets can play in this process of ecological transition. in capital markets we have seen some positive discrimination in the valuation of firms with a lower degree of exposure to climate change, albeit limitedly so. logically, and as in the case of banks, the markets should act as a catalyst for change 4 / 5 towards certain sustainable activities, while discouraging investment in particularly polluting industries. evidently, the attractiveness for investors of issues of green bonds is a sign of the growing concern over the effects of climate change. yet for the aforementioned transmission mechanisms to work properly, the volume of securities traded on these markets must reach a critical mass and be consistently catalogued. to achieve this, the initiatives developed within the european commission are essential : these include most notably the taxonomy for determining the activities that contribute to sustainability in environmental terms, and the “ ecological ” labelling of financial products. we need a common language that can be used both by debt issuers and potential investors, so that these markets may be developed. on this point of financial investments categorised as “ green ”, it is worth recalling that we as central banks are also active investors in financial markets, both in monetary policy operations and in portfolio management relating to reserves. in this connection, as acknowledged in the report by the network of central banks and supervisors, and as recently indicated by mario draghi, we are aware that environmental risks are not yet being built into most of this portfolio ’ s ratings, whether internal or devised by rating agencies. accordingly, in the eurosystem, a thorough review of these risk valuation processes is under way. the aim is to ensure us that all the relevant factors, including environmental ones, for the prudent management of the portfolio held by the central banks are being taken into account. in addition, i should point out that, like the ecb, we resolutely support the initiative recently launched by the european securities markets authority ( esma ). as the regulator of rating agencies,