## The Challenges of Financial Reform and Financial Stability in Asia

_IMF News, July 11, 2016_

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## Bibliographic details
- Published: July 11, 2016

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### 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.*

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## References

- [Mitsuhiro Furusawa](http://www.imf.org/external/np/omd/bios/mf.htm)
- [Singapore and the IMF](http://www.imf.org/external/country/SGP/index.htm)
- [Speeches](https://www.imf.org/en/news/searchnews)
- [PRESS CENTER](http://presscenter.imf.org/)
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_Source: https://www.imf.org/en/news/articles/2016/07/12/19/01/sp071116-speech-by-dmd-furusawa_