The Challenges of Financial Reform and Financial Stability in Asia

IMF News, July 11, 2016

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Published: July 11, 2016

Introduction

Speech at the Federal Reserve Bank of San Francisco/Monetary Authority of Singapore Symposium, July 11, 2016.
Key premise: neither financial stability nor economic growth can be achieved by standing still; constant vigilance and reform are required.
Recent events (e.g., the Brexit referendum) underline the ongoing need for vigilance against unexpected developments.

The Global Outlook

Fund’s outlook: ongoing, subdued recovery that faces many risks; advanced economies growing at a modest rate with unresolved legacies from the crisis, particularly in Europe.
Emerging and developing economies remain the most important contributors to global growth, but growth has slowed due to:
- decelerating world trade,
- weak commodity prices,
- tighter credit conditions caused by market volatility and heightened risk aversion.
Asia:
- Remains a key driver of global growth, but is slowing, led by China’s deceleration toward 6 percent annual growth.
- Southeast Asia shows relatively robust momentum in the ASEAN countries driven by domestic demand.
Major risks highlighted:
- Outcome of China’s economic rebalancing; a sharper-than-expected slowdown could reverberate globally.
- Global economic and financial conditions: trade and financial linkages make the region sensitive to cyclical changes and sentiment shifts.
- Rising private sector and household leverage across many countries following rapid credit creation since the Global Financial Crisis.
- Declining corporate profitability stretching debt-servicing capacity and raising refinancing pressures, especially in commodity-exporting countries and commodity-related sectors.
China-specific corporate debt metrics:
- IMF Global Financial Stability Report estimated “debt-at-risk” had increased to 14 percent of listed Chinese companies’ debt, up from 4 percent in 2010.
Policy implication: Chinese corporate debt is considered manageable if the government moves quickly with measures that both address current problems and prevent recurrence.

Ensuring Financial Stability

Asia’s resilience attributed to post-Asian Crisis policies and reforms: more flexible exchange rate regimes, stronger reserves positions, strengthening bank capital and liquidity under Basel III.
Continued imperatives:
- Reinforce commitment to resilience and financial stability.
- Prepare for sudden reversals of market sentiment and capital flows.
- Continue strong macroeconomic policies and pursue structural reforms to support domestic demand and raise productivity.
- Address gaps in infrastructure and education, and policy and institutional weaknesses that hamper progress.
- Create fiscal space to generate resources for the next stage of development.

Financial Sector Deepening

Definition: moving beyond traditional banking practices to create financial products and opportunities that lift productivity and fuel sustainable growth.
Roles and priorities:
- Capital market development to create long-term funding channels for infrastructure; reduce over-reliance on foreign currency borrowing.
- Undertake infrastructure projects within macroeconomic frameworks that encourage domestic and international investment, including public-private partnerships.
- Broaden financial inclusion—expand access to financial services in South Asia and the ASEAN countries, particularly for women.
- Encourage diverse approaches: expansion of Islamic finance in some countries, more micro-financing in others, broader use of financial technology including mobile banking.
Risk management and supervisory priorities:
- Innovation must be coupled with constant vigilance: macro- and micro-prudential measures to address continued credit growth.
- Monitor excessive corporate leverage and bank exposure.
- Improve asset classification practices and address data gaps that hinder monitoring.
- Ensure supervisors have resources and authority to address emerging risks.
- Strengthen provisioning where non-performing loans are rising.
- Increase transparency in financial markets.

The Role of the IMF

Functions highlighted:
- Provide policy advice and spread best practices through Article IV reports and cross-country analytics.
- Use the Financial Sector Assessment Program to identify vulnerabilities and make concrete suggestions to strengthen oversight and financial sector development.
- Foster dialogue among member governments and stakeholders on issues such as disintermediation in correspondent banking relationships and its unintended effects on grassroots financial institution development.
- Deliver technical assistance and training to meet concrete member country needs as financial sectors evolve.
Global and regional safety nets:
- Support for regional initiatives such as the Chiang Mai Initiative, viewed as essential protection and a complement to IMF efforts.
- IMF is in a stronger position following a recent increase in quota resources and expansion of its toolkit to provide more, and more flexible, financing facilities.
- Work with the international community to strengthen defenses against continued global uncertainties and emphasize the importance of a fully resourced IMF.
Governance and engagement:
- Asian members now have a larger say in the Fund’s governing councils thanks to recently approved governance reforms.
- IMF must continuously improve its work and maintain vigilance in light of changing global conditions.

Conclusion

Combined efforts—macroeconomic discipline, structural reforms, financial sector deepening, and strengthened regional and global defenses—can enable greater economic possibilities for Asia.
While Asia cannot eliminate all uncertainties in an interdependent world, anticipating risks, insuring against unavoidable shocks, and preparing for the unexpected can facilitate continued progress.
The IMF’s role: help deepen and defend financial sectors and work with Asia-Pacific members to achieve the best possible outcomes.

Source: The Challenges of Financial Reform and Financial Stability in Asia — Speech by Mitsuhiro Furusawa, Federal Reserve Bank of San Francisco/Monetary Authority of Singapore Symposium, July 11, 2016.