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Speech by Dr Yoichi Nemoto, AMRO Director, at ASEAN Financial Literacy Conference

2018-12-17T02:17:46+08:00September 10, 2013|Speeches|

Financial Literacy, Managing risks and challenges in ASEAN+3 economies

Introduction

  • ASEAN+3 Macroeconomic Research Office (AMRO):
    An independent regional surveillance unit established by ASEAN+3 economies in 2011, to monitor and analyse regional economies and support Chiang Mai Initiative Multilateralisation (CMIM) decision-making. • Financial literacy – important link to financial stability. OECD (2009): “…the lack of financial literacy of individuals cannot be pointed at as the only factor leading to the crisis… [but] financial illiteracy certainly contributed to deepening and worsening its effects”. • Examples from the Global Financial Crisis – US subprime mortgage crisis – Central and Eastern Europe: foreign currency mortgage loans – Hong Kong and Singapore: Minibonds default
  • Financial literacy – important link to financial stability. OECD (2009):
    “…the lack of financial literacy of individuals cannot be pointed at as the only factor leading to the crisis… [but] financial illiteracy certainly contributed to deepening and worsening its effects”.
  • Examples from the Global Financial Crisis
    – US subprime mortgage crisis
    – Central and Eastern Europe: foreign currency mortgage loans
    – Hong Kong and Singapore: Minibonds default

Suggestions on where improved financial literacy can play a key role:

  • Short-term
    -Low interest rate environment: risk of households
    overleveraging
    -Exchange rates: hedging by corporates
  • Medium-term
    -Infrastructure needs: mobilising domestic savings to
    support economic development
    -Ageing populations: individuals need to save wisely for
    retirement and healthcare

“Mortgages are for many consumers the most important debt they will take on in their lifetime.”

  • Environment of persistent global low interest rates may encourage overleveraging by households
  • Some ASEAN+3 economies have imposed macroprudential measures (e.g. loan-to-value ratios) and tightened supervision of banks’ lending [policy makers’ measures]
  • Should be complemented by financial education on mortgages and other consumer debt[households’ “self-defence”]:
    – Borrowers should understand key terms and conditions of the mortgage loan,
    including effective interest rates, fees and penalties; and impact on installment
    payments if interest rates increase.
  • With ASEAN+3 economies being increasingly open to trade and investment, there is a greater need to hedge foreign exchange risks, e.g. among exporters and importers
  • Financial literacy – not only for individuals but also for corporates in their risk management 
    -Corporates in more advanced ASEAN+3 economies are already
    hedging their foreign currency exposures (e.g. Japan’s multinational
    companies)
    -Hedging is less widely done in developing ASEAN+3 economies due to
    lack of awareness, or high business cost of hedging
    -Authorities, together with private sector, may need to build awareness,
    both among corporates and financial institutions on hedging products.
  • As ASEAN+3 economies grow and develop, their infrastructure needs increase (transport, power, water supply etc)
  • Need to mobilise savings, both domestic and foreign, to finance these infrastructure needs.
  • Low financial inclusion: the population may be saving, but they are not saving through the formal financial sector such as banks (see next slide)
    -Challenge to mobilise domestic private savings towards
    economic development, including development projects.
  • Associated policy challenge: Monetary policy transmission mechanism may not work predictably with large amount of savings in informal financial sector.

Are people saving enough and saving wisely for retirement and healthcare needs?

“Not only do defined contribution pension plans transfer longevity and investment risks to individuals, but the [2008-2009 global financial] crisis has exposed an array of vulnerabilities where many households have been brought to purchase unsuitable financial products…”

  • As populations age, pensions and healthcare burdens on governments increase:
    -shift from defined-benefit to defined-contribution pensions?
    -individual responsibility for healthcare costs
  • Financial education is necessary to encourage individuals to save enough and appropriately for retirement and healthcare needs.
  • Focused so far on the opportunity costs and indirect costs of lack of financial literacy, and also the areas (opportunities) where more financial education can be directed to.
  • There is a direct cost of funding financial literacy programmes now, for long-term benefit.
  • Multi-pronged approach may be best: involving the public sector, private sector and non-government or non-profit organisations (Japan’s case).

Agencies promoting financial literacy

  • Financial literacy improves the life-cycle financial wellbeing of individuals and families.
  • Financial education as an important tool to manage risks and challenges in ASEAN+3
  • Greater financial inclusion and better financial education can also improve fiscal and monetary policy management.
  • While there is a direct cost of funding financial literacy programmes now, this leads to long-term benefit for the economy. A multi-pronged approach involving the public sector, private sector and non-government or non-profit organisations may be best.

Thank you.

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