1. Permanent Secretary Peter Ong, Managing Director Ravi Menon, Deputy Governor Neav, Deputy Minister Choi, AMRO Advisory Panel Chair Chalongphob, Honourable Ambassadors, Distinguished guests, ladies and gentlemen.
2. On behalf of AMRO, I would like to express my utmost gratitude for all of the guests who are gathering here today to celebrate our grand opening ceremony. I also welcome the participants from ASEAN+3 officials who came all the way to attend this event today. I believe this is the testament to the enthusiasm and high expectation of ASEAN+3 countries to our office.
3. I would also like to express my profound and sincere gratitude for the authorities of ASEAN+3 for their strong support they have extended to me and my staff, especially to the Government of Singapore for hosting AMRO and providing the excellent office with excellent facilities and other extensive support to us. Located in Singapore, a financial centre and the transportation hub in this region, AMRO can fulfill its function efficiently and effectively.
4. Last year, I devoted myself in establishing this office such as staff recruitment, preparation and execution of the office budget, and formulation of office administrative routines. When I first entered the office on 17 May 2011, there were only two persons sitting in the office, myself and Susan, my temporary assistant, but she is of great help to me. However, from the middle of October 2011, AMRO became fully operational as the 10 staff I recruited all began to work in the office. The staff number will further increase to 21 this year. Our economist team has already started economic and financial surveillance both on and off site. Our website was launched last year. I am very glad that we are finally, here today, able to pronounce the opening of our office to you here.
5. Taking this opportunity, please allow me to briefly introduce our office, AMRO, as some of the guests may not be fully familiar with what we do and who we are. As Deputy Governor Neav explained, AMRO – ASEAN+3 Macroeconomic Research Office – was established in April last year by the initiative of ASEAN+3 finance ministries and central banks. As an independent macroeconomic surveillance unit of the ASEAN+3 members, AMRO’s purposes are to monitor and analyze regional economies and to contribute to early detection of risks, swift implementation of remedial actions and effective decision-making of the CMIM (Chiang Mai Initiative Multilateralization).
6. In the ASEAN+3 region, remarkable economic development is taking place. At the same time, economic and financial market integration is progressing rapidly. In the normal peace time, ASEAN+3 countries enjoy the benefit of integration greatly. However, no matter how good economic policies the authorities are pursuing, increasingly fast and erratic global capital flows may give negative impacts at times, even undermining the economic fundamentals. Therefore, AMRO’s surveillance is focusing more on how this cross capital flows could potentially affect the Balance-of-Payments and foreign exchange liquidity of the ASEAN+3 members, and what could potentially trigger these events.
7. As concrete method, during the peace time, AMRO conducts economic and financial surveillance by monitoring economic and financial development in the office, developing and updating database, sending annual missions to all of the member countries, submitting confidential reports to ASEAN+3 authorities on a quarterly basis, and contributing to the discussions at the ASEAN+3 process of Economic Review and Policy Dialogue. By doing so, AMRO attempts to contribute to the early risk detection and swift implementation of remedial actions by the members in the region.
8. Meanwhile, during the crisis time when some members request for liquidity support through the CMIM facility, AMRO will provide an independent opinion about the economic and financial situation of such member, especially whether such member fulfills various requirements under the CMIM Agreement.
9. Ladies and gentlemen, now please allow me to draw your attention on the global economy and its impact in this region.
10. Global economy started strongly in early 2011, but escalating strains in the euro area in particular weighed down overall performance in 2011. Having peaked around the second and third quarters of 2010, the growth rates of the advanced economies slowed considerably and contracted in the final quarter of 2011, with the exception of the US economy. Overall, the world economy expanded by only less than 4 percent in 2011, compared to 5.2 percent in 2010. While the emerging markets still posted over 6 percent growth rate, the advanced economies only expanded by less than 2 percent in 2011.
11. The fragile economic outlook is likely to continue in 2012, especially during the first half of this year. As in 2011, the focus mainly remains with the policy initiatives and crisis recovery processes in the euro-zone economies this year. Along with the dimmed growth prospects across the globe, volatilities of the financial market should elevate. Furthermore, the sovereign debt crisis and potentially sharp deleveraging by major global banks are interconnected root-causes of uncertainties to be closely monitored, especially in the first half of 2012. Allow me to elaborate a bit more on these important matters.
12. On the fiscal front, a combination of weak growth outlook, lack of revenue buoyancy and elevating cost of financing, as reflected by a marked and sustained increase in yields of sovereign debts in average, points to a real worry over the unsustainability of fiscal and debt position of many euro-zone economies in 2012. In recent months, we witnessed downgrading of the status of sovereign debts for 9 euro-zone economies. In 2012, estimated around 1-1.2 trillion euro worth of euro-bonds will mature and more than 400 billion of it will need to be rolled-over in the first quarter of 2012. Hence debt and fiscal sustainability remain major concerns in 2012 and will continue to be a drag on the overall growth performance of the euro-zone in particular and possibly on the global economy.
13. Volatilities of the financial markets, especially asset markets, are likely to elevate in 2012. Stock exchange indices of major European economies experienced sharp falls and some have in fact already dropped to levels substantially below the reported indices during the 2008 Lehman-Brothers period. Corrections of the asset markets, including property markets, have affected most countries in late 2011 and the trend is envisaged to continue in early 2012.
14. Tightening of lending standard and deleveraging activities of the global banks, predominantly from the advanced economies of the Europe, have intensified since last quarter of 2011 and are very likely to continue in the first half of this year. One factor is the pro-cyclicality nature of the bank lending. Lending generally fluctuates in tandem with GDP growth. Weaker economic expansion in the past is often associated with declining of lending. Tightening of lending standard is another likely cause of further deleveraging and therefore cuts in lending in the near future. Lenders in Europe have pledged for a significant cut in risky and short-term loans to meet the required 9 percent core capital ratio.
15. The emerging markets of the world, including those of the ASEAN+3 economies, need to anticipate potential impacts of the lending cuts by the European banks as they adjust their portfolio allocations. For some of these developing economies, international bank lending amounted to big shares of the total bank lending domestically. As the global banks reduce short-term loans, the availability of trade financing is likely to shrunk, along with the rise in the cost. In 2010 and 2011, eight major European banks were among the top 10 banks providing trade financing to the world.
16. Another key transmission channel of shocks from the frail advanced economies to the world is trade. The European economies are among the biggest importers in the global trade arena. The total imports of euro-economies were around 48 percent of the global imports, compared to 24 percent of the US and 18 percent of China. Growth slowdowns or contractions of the European economies in 2012 should therefore further tumble the already fallen global imports. Along with the falling demand by the advanced economies, potential cuts in trade financing could spell further troubles for export-dependent economies of the world, including those in the Asian region.
17. Given the aforementioned outlook of the global economy in 2012 and our mandate, the AMRO enters the year with continuous vigilance on the impact of the Eurozone sovereign debt crisis on the ASEAN + 3 economies. We have seen the impact of the Eurozone debt crisis on the region predominately through two channels: merchandised trade and finance markets.
18. The first is the impact on the demand for Asian exports. EU demand for Asian exports lost momentum through last year and growth of exports to the EU has been declining since the second half of 2011. For example, China exports to the EU grew only 14% in the whole year of 2011, much slower than the 34% growth in 2010. The growth of Korea exports to the EU was similar to that of China, falling from 15% in 2010 to only 4% last year.
19. Nevertheless, the region’s direct export exposure to the EU has been reducing, mainly because of the increase of the trade within the region in the recent years. Let me take Thailand as an example, the share of the exports to the EU to its total exports decreased from 11.2% in 2010 to 10.5% in 2011. In light of the limited direct trade exposure to the EU, some market analysts expect that the drag on the growth of the region from the reduced EU demand should be relatively smaller, which we certainly wish to be true. However, we should not underestimate the impact on the market sentiment should the Eurozone sovereign debt crisis deepen later in the year.
20. The second is the impact of the Eurozone debt crisis on the global financial sector. As banks in the region do not have significant holding of Eurozone sovereign debt product, they are not considered to be at significant direct risk from the debt crisis.
21. However, the effect on the reduction of credit provision from the European banks to the regional banking, the so-called bank deleveraging, remains a risk to us. The easiest lending to be retreated is cross-border claims. Except Hong Kong and Singapore, the two international financial centres in the region, according to the BIS data on European banks’ external claims, the cross-border claims of those banks on our banks relative to our foreign exchange reserves are fairly small, when we are compared to other regions. Furthermore, our banking systems have been strengthened considerably after the Asian financial crisis in 1997 and 1998. A lot of the lending in our economies is now funded mainly by domestic deposits.
22. On the other hand, there is no place of complacency for policy makers in the region this year. We need to continue our caution and vigilance on the impact of the Eurozone sovereign debt crisis, particularly in view of its indirect impact on the region through the two largest economies in the region, China and Japan.
23. Using this opportunity, I would like to emphasize the importance of regional cooperation among ASEAN+3 countries.
24. Let me draw your attention to the fact that the plus 3 countries, namely China, Japan and Korea, collectively occupy 28% in ASEAN countries’ international trade. Compare this figure with the intra-ASEAN trade of 25% and a combined share of US and EU in ASEAN trade which stands at 19%.
25. When we look into foreign direct investment figures, a similar trend emerges again. China, Japan and Korea’s collective share in FDI inflow into ASEAN countries is 20%. Please note that the intra-ASEAN FDI is 16% and the combined share of EU and US in inward FDI into ASEAN is 34% respectively.
26. Against this backdrop, economic and financial cooperation among ASEAN+3 Countries will be all the more important, in particular considering the slowdown of the global economy and a lot of uncertainties which will shadow the prospects of the global growth.
27. In the short term, a possible downturn in the advanced economies may hit the region negatively in the coming years, through the channel of global trade and investment, directly and/or indirectly. It is something more or less inevitable in this globalized world. However, robust and continued growth in the ASEAN+3 countries will feedback on regional demand, which is sure to contribute to stability and prosperity in the region and in the global economy.
28. In a nutshell, one of the most important agenda for ASEAN+3 governments is to continue and move forward in economic and financial cooperation in this region. It will be effective to extend the scope and level of commitments in the existing free trade agreements in the region. It will be even more important to make progresses in establishing a common regional FTA and/or creating regional economic community in the long run. Advancing and enhancing financial cooperation will be crucial, as well. In this context, the ASEAN+3 discussion of the crisis prevention function to be added to the CMIM should be accelerated given the global economic situation. To fulfil this function, the existing CMIM in terms of its financial resources must be increased substantially. Many other aspects of CMIM should also need to be adjusted. The urgency to reach a consensus on this new function cannot be overemphasized in order to strengthen the regional financial safety net.
29. AMRO is now fully vigilant on the development in Europe and the world and its potential impact on the ASEAN+3 members. All the AMRO staff and myself will dedicate our best efforts in pursuing and upgrading the financial and economic surveillance role in the region. I sincerely hope that AMRO will help safeguard the ASEAN+3 countries from these global uncertainties and makes its due contribution to the stability, growth and prosperity of the region.
Thank you very much.