The FINANCIAL — Asia and the Pacific needs to make greater efforts to promote financial sector reform and strengthen regional cooperation to safeguard the region’s economies against future financial shocks, according to participants at a joint Asian Development Bank (ADB) and Korea Development Institute (KDI) conference.
“Asia’s financial systems have become much healthier, but we should be vigilant about global economic developments,” ADB President Takehiko Nakao said at a conference on Regional Financial Cooperation to Enhance Financial Resilience and Stability in Seoul. “Developing Asia must continue sound macroeconomic policy and structural reforms to help sustain the region’s growth momentum.”
Mr. Nakao took part in the seminar alongside government officials, private sector leaders, academics, and other experts to discuss the challenge of enhancing regional financial cooperation. He emphasized the importance of well-regulated and strengthened financial systems and involvement of the International Monetary Fund when crisis occurs.
Financial sector development remains a key challenge in many countries. Bank deposits in developing Asia are only 60% of gross domestic product (GDP), less than half the total for OECD countries. Asia’s bond markets equal less than half of GDP, a third of the 140% found in the advanced economies. In several developing countries, less than 5% of households have a bank account and many smaller firms lack access to credit.
The region’s increasing financial openness has spurred investment, noted KDI President Joon-Kyung Kim. However, tapping overseas funding sources, which can be subject to high volatility, must be weighed against the risks of sudden reversals, he said. Countries should carefully consider suitable policy tools to increase resilience against financial sector shocks.
Prudential regulations on capital flows can help policymakers address the risks associated with volatile capital flows and large swings in foreign monetary policies, remarked ADB Chief Economist Shang-Jin Wei. Resilience to external financial shocks can be reinforced by policies that mix some capital controls with exchange rate flexibility, he said.
The development of local currency bond and infrastructure bond markets remains a challenge, added Naoyuki Yoshino, Dean of the ADB Institute. It is important to address barriers for small and medium enterprises in accessing financial institutions, he said.
Panelists noted that the region’s robust economic growth has been supported by a broadening and deepening of the financial sector through bond market development and improved banking supervision. Discussion included the Asian Bond Markets Initiative, which aims to develop an alternative to short-term foreign debts and encourage infrastructure investment, and the Chiang Mai Initiative Multilateralization, a regional financial safety net that acts as a multilateral currency swap facility, as well as the role of the ADB.
Professor Kyungwook Hur of the KDI School of Public Policy and Management chaired the panel session and Professor Yeongseop Rhee of the Graduate School of International Studies at Seoul National University and Jacob Kirkegaard of the Peterson Institute for International Economics also joined the discussion.
ADB, based in Manila, is dedicated to reducing poverty in Asia and the Pacific through inclusive economic growth, environmentally sustainable growth, and regional integration. Established in 1966, it is owned by 67 members—48 from the region. In 2014, ADB assistance totaled $22.9 billion, including cofinancing of $9.2 billion.
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