It is a great honor and pleasure to be here this morning at this roundtable discussion and to be given the opportunity to speak on regional cooperation and integration. I was fortunate to attend the inaugural launch of this economic integration monitor in July last year in Singapore and strongly encouraged the continuation of this publication. We need a total picture of regional economic integration by an objective and insightful institution such as the Office of Regional Economic Integration (OREI).
Given my capacity as the director of AMRO, my talk today will be mainly focus on ASEAN+3 economies.
Today I will talk about two issues. The first is on the recent economic condition of the ASEAN+3 region, and the second is on lessons from the European experience.
Recent Economic Condition of ASEAN+3
Let me first briefly give an overview of the recent economic condition of ASEAN+3 economies.
Real economic activities in the region have rebounded modestly, with regional economies benefiting from the moderation in global tail risks, as well as from a strengthening in China’s growth towards the end of the year. However, as mentioned by Dr. Rhee in his presentation earlier, growth profiles differed across the region. GDP growth in Japan and Korea expanded more moderately in the fourth quarter due to the lack of domestic demand drivers. In contrast, the growth of major ASEAN economies outperformed expectations, mainly on the back of strong consumption demand and government-initiated investment.
External sector condition also differed across the region in 2012. Not only have current account surpluses narrowed in some ASEAN economies, but current account balances, in certain cases, demonstrated swings between a surplus and a deficit over the course of 2012. On the other hand, the current account surplus in China and Korea widened due to slower growth in imports. To a certain extent, commodity prices contributed to the volatility in current accounts across the region, particularly for commodity-exporting ASEAN economies.
Supported by positive fundamentals and continued accommodative monetary policy in advanced economies, ASEAN economies are still the primary beneficiaries of net capital inflows (direct investment and portfolio capital). On the other hand, China recorded sizeable net outflows in the second quarter last year and the net outflows continued until the fourth quarter.
Inflationary pressures in the region have been largely in check. Moderating global food prices and continuing stable energy prices contributed to relatively stable headline inflation in regional economies. China and a few ASEAN economies, notably Thailand and Lao PDR, experienced temporary reacceleration in headline inflation in December 2012, mainly due to rising food prices from seasonal factors, as well as to changes in administrative prices. With the exception of the yen and rupiah, regional currencies have mostly strengthened against the US dollar since August 2012.
Indicators of banking sector soundness (up to end-September 2012) were largely stable, with generally strong core capital positions. Relatively sound public finances across the region have further promoted economic and financial stability in the region. Moreover, with the exception of several economies, public debt to GDP ratio is fairly low. The relatively sound public finances have enabled several economies to continue implementing fiscal stimulus measures to bolster domestic demand as necessary.
Notwithstanding the resilient economic condition in the region, some major risks remain and need to be monitored closely. This also shows that effective surveillance and early detection of risks and vulnerabilities continue to be much needed in this region.
First, growth is expected to be capacity-constrained in several regional economies, whereby output is either approaching or currently above trendgrowth. Robust domestic demand has given rise to tighter labor market conditions which could in turn exert upward pressure on prices. Demand-pull inflationary pressures could be building up as economic slack is gradually declining and the output gap is expanding, while lagged effects from supplyside shocks due to weather-related disruptions could feed into consumer price inflation.
Second, continued capital inflows arising from ample global liquidity potentially risks fuelling rapid asset price inflation in regional economies. Despite policies to curb excessive domestic credit growth, the rate of credit growth in some regional economies remains fairly buoyant. Housing loans by volume has increased, particularly in economies that are experiencing rapid increases in property prices. Despite the current low non-performing loan (NPL) ratios in this segment of bank lending, close monitoring is essential, given that the NPL is a lagging indicator. If left unchecked, the risk of default could rise and cause a larger-than-expected correction in property prices, which could jeopardize overall financial stability.
Third, with the reduction in global tail risks, there could be decreasing demand for government bonds as investors move into higher yielding, riskier assets.
Fourth, we observe in some early signs of overheating in the developing economies of ASEAN+3.
Lessons Learned from Eurozone Debt Crisis
Let me move on to the second topic, which relates to some of the lessons learnt from the recent Eurozone Debt Crisis.
First, I would like to emphasize that independent surveillance work can help deter a potential financial crisis from developing. If the surveillance function had worked properly and independently, the crisis in Europe could perhaps have been averted or resolved at the early stages. Independent surveillance, assessments and reporting procedures are therefore critical for early detection of risks, thereby allowing preventive measures to be taken accordingly.
Second, recent crises also underline the need for deeper monitoring of the interlinkages in the global economy and, in particular, the potential for financial sector movements to rapidly ignite and propagate risks that could lead to a potential crisis.
Since the onset of the Eurozone sovereign debt crisis, we have seen the crisis spread quickly from relatively smaller economies to other Eurozone economies while also adversely affecting the global economy through the finance and trade channels. The CMIM today is aimed to cope with short-term balance of payments difficulties. The European experience of the strong relationship between the banking sector and sovereign debt give us important insights for future preparation.
Third, in some cases, regional efforts may not be enough for effective crisis prevention and resolution. Thus, there is a need for close cooperation between regional and global financial safety nets.
As you are well aware, the Eurozone sovereign debt crisis has now resulted in the establishment of ESM, the Eurozone’s regional financial safety net, in close cooperation with the IMF, the global financial safety net. Why did Eurozone governments still have to resort to the global financial safety net after receiving help from the regional financial safety net?
In my view, Eurozone authorities resorted to borrowing from the IMF to receive not only financial support but also to gain credibility. If a crisis stems from external shocks, a country or region may only require liquidity support. However, if a crisis stems from internal weaknesses and problems, the country or region will not only require liquidity support but will also need to restore credibility to its economy, and this can only be provided via an external help. The Eurozone sovereign debt crisis was a crisis brought on by structural weaknesses within the Eurozone, such as the lack of competitiveness, weak external position and non-sustainable public finance. Accordingly, Eurozone economies in crisis needed to obtain credibility on its bailout programs and therefore sought help from the IMF in addition to receiving regional financial support.
In the same vein, should external shocks lead to a crisis in this region, the members of the CMIM may try to resolve it without support from the IMF. However, if the crisis stems from within the region, even large amounts of liquidity support may not be sufficient to solve the situation.
Last but not least, I would like to emphasize the importance of accurate, timely and transparent data.
Recently in the Eurozone, accurate data which would have properly captured the fiscal position of some economies was lacking. If such data had been available, and credible, risks in the Eurozone could have been detected earlier and the extent of the crisis could have possibly been less severe.
Accurate, consistent, timely and transparent data is a pre-requisite for proper macroeconomic and financial surveillance. It is true that the data of this quality does not exist for certain member economies. In some other countries, data may exist but they are not made public. All these restrictions on data make it challenging and difficult for surveillance work to be carried out effectively.
In conclusion, may I once again emphasize my remarks expressed at the outset of my speech. Regional integration is a very important policy agenda, given the many events happening in various part of the region in various sectors, as well as around us. I have no doubt that the monitoring and analysis by ADB’s OREI will be a very valuable contribution which will help us understand these important developments.