IMF on Reaping the Benefits of Financial Integration: What Is To Be Done?
IMF-Stock Exchange of Thailand International Capital Markets Conference
Opening Remarks by Mitsuhiro Furusawa
Deputy Managing Director, International Monetary Fund
As Prepared for Delivery
Good morning distinguished guests and participants.
I am pleased to be in Bangkok today to welcome you to this timely and important conference on building regional capital markets in the Greater Mekong subregion. I would like to express my appreciation to the Stock Exchange of Thailand for agreeing to host this event along with our Regional Office for Asia and the Pacific. We are discussing a dynamic region whose diverse countries are linked by a great river and common aspirations—a desire to find their rightful place in the global economy, to improve living standards, and to do so in a spirit of cooperation and harmony.
Asia’s economic potential—and that of the Greater Mekong region—is undeniable, with its young populations and growing middle classes who are fueling its economic dynamism. The region’s financial sectors have shown they can underwrite strong growth without jeopardizing stability. This reflects lessons learned from the Asia Crisis of almost 20 years ago, and a willingness to make tough choices to support sustainable growth and financial stability.
Let me set the stage for today’s sessions by discussing briefly challenges and risks of financial development and integration, and the policies that can ensure success.
Global and Regional Economic Setting
Let’s begin with the economic outlook. You are all fully aware that world growth has slowed recently, including in Asia. The IMF projects that the global economy will grow 3.6 percent in 2016, while Asia is expected to expand at a 5.4 percent pace. So clearly, for all of the uncertainty about the outlook, this region remains the fastest growing in the world. But there is still more that can be done to unlock Asia’s full potential.
One important way to accomplish this is to continue on the road to financial integration. But this process remains at an early stage, and has not kept pace with the integration of the real economy.
Perhaps this is inevitable. Regions naturally tend to be more integrated economically due to information, transport, cultural, and trade links. Moreover, here in Southeast Asia integration has been a common policy goal. It is most impressive to see the rapid rise of Asian supply chains as global forces.
This trend places a premium on the financial integration that can provide new sources of growth. Because countries are at different stages of development, and face diverse external and home-grown pressures, deepening financial integration across a wide range of countries can help countries insure each other. But there are many challenges ahead.
Challenges of Financial Integration
The demographic and structural transformations that Asia is experiencing have been accompanied by significant changes in saving and investment patterns. Matching these rapidly evolving saving pools and large investment needs poses challenges to financial development and deeper financial integration.
The investment needs of business inevitably will exceed a company’s own resources, and the traditional recourse to the banks that dominate Asian financial systems may also be insufficient. So companies will need to issue more equities and bonds, meaning larger, more stable, and more liquid capital markets. That, in turn, will mean looking beyond national borders to tap into capital available in Asia and on global markets.
New urban residents and the growing middle classes also will need more diverse and sophisticated financial products. They will want to purchase houses and cars, but also save for the future with equities, mutual funds, and other investment products. And these products will not necessarily be sourced only in their own countries.
As greater availability of credit helps reduce precautionary savings and smooth consumption, there will be benefits for macroeconomic stability. Wider access to finance also could help create opportunities for the poor. This financial inclusion is essential to the efforts to reduce poverty and income inequality.
At the same time, financial sector development is crucial to government efforts to build the foundations for future growth—particularly infrastructure development. Here, too, local pools of savings may not be sufficient to fund investments of the scale needed. Additionally, channeling funds into long-term investment may remain a difficult task, particularly in emerging and developing economies, for many reasons: investors’ time horizons may not be long enough, legal systems may not be sufficiently robust to settle the disputes that arise, or financial systems may not be able to turn an infrastructure project into a financial product investors will buy.
Risks of Integration
Each of these challenges carry the potential for tremendous benefits, but we cannot forget about the risks of financial integration. Capital flows can be large and volatile, global credit cycles might not fit each country’s needs at all times, and integration tends to make financial markets move more closely together across countries. As we have learned in recent years, the more open a country, the greater the potential risks—and benefits.
We saw these factors play out in the Global Financial Crisis. In many cases, financial integration had run ahead of regulatory and prudential frameworks, and international coordination efforts. Here, Asia has an advantage. It can avoid repeating the mistakes of the advanced economies
So how can we best maximize the benefits and minimize the risks? Allow me to offer three broad policy suggestions:
First and foremost is building strong frameworks for macroeconomic and financial sector policies. Of course, these include macroeconomic anchors such as independent central banks and fiscal policies that can operate countercyclically while limiting public debt build-ups. But just as important are strong regulation and supervision, which rapid growth and evolving financial integration make all the more critical.
This is not enough. Even with good regulation and supervision, it is essential to guard against the instability that large capital flows can cause. So my second point is that countries need strong macroprudential policy frameworks. Countercyclical macroprudential policies can reduce the buildup of financial risks in the good times, while mitigating the fallout when capital flows reverse, credit growth slows, and asset prices fall.
Third, cooperation at the regional level is essential. Information needs to be shared openly and rapidly between countries, while regulations should be harmonized as much as possible. This will help level the playing field across sectors and countries, reduce the opportunities for regulatory arbitrage, and lower the cost of financial services across the region. This is the lifeblood of regional integration.
Let me conclude here by restating my view that Asia and the Greater Mekong region have a lot to gain by advancing financial integration. Over the years, we have learned important lessons about financial integration; we have seen significant benefits and costs. I hope today’s discussions will help all of us advance the agenda of regional integration in light of global experiences. I’d like to stop at this point, and give the platform to Permanent Secretary Sujjapongse.