By Christine Lagarde, Managing Director, International Monetary Fund
(Jakarta, Indonesia) — Good morning. Selamat Pagi. I would like to express my appreciation to Governor Martowardojo for the kind introduction.
I am pleased that you could join us today for this conference on The Future of Asia’s Finance.
This is a timely topic, particularly in light of recent events. “These are times that try men’s souls.” That famous statement was written in the 18th century by Thomas Paine. Less well known was what followed: “What we obtain too cheap, we esteem too lightly: it is dearness only that gives everything its value.”
These are words nearly 250 years old that remind us of the true worth of our well-being in trying times. Indeed, financial markets in a few short weeks have underlined the value that we all attach to financial stability—and what we must do to preserve it.
The markets also have demonstrated how much Asia is at the core of the global economy. This is testimony to the extraordinary gains of the past generation. Some Asian countries have taken their places among the advanced economies. Some have achieved emerging market status and are reaching higher. Others are still climbing the ladder of development. Together they have become a key source of global growth.
You have given the world new vitality, and now you are facing renewed volatility. So let me speak for a moment to the current situation.
This region knows from bitter experience where turmoil can lead. In recent years you used the experience of the Asian Crisis to weather the Global Financial Crisis and the 2013 Taper Tantrum. By putting in place strong macroeconomic policies and strengthening your financial systems, you withstood instability.
Now you are feeling the impact of China’s rebalancing, Japan’s continued slow growth, and falling commodities prices. You are facing the prospect of higher U.S. interest rates. My message today is that there is reason for continued confidence in the region. Your governments fully understand what needs to be done and are ready to take further action if needed. Of course, policies need to be tailored to different countries’ circumstances, but they should include:
• strengthening defenses with prudent fiscal policy;
• reining in excessive credit growth;
• allowing the exchange rate to act as a shock absorber;
• maintaining adequate foreign exchange reserves;
• and building up regulatory and supervisory oversight of the financial sector.
At this conference, we are focusing on the financial sector issues that are essential to this policy mix.
So allow me to take a few minutes to highlight some of the key challenges that will be crucial to address if Asia is to create the financial systems that can help ensure stability and fuel the next stage of its success story. I have grouped these challenges as four I’s: innovation, integration, infrastructure and inclusion.
Innovation—Sustaining Asia’s Growth Momentum for the Next Generation
Let us begin with innovation. Asia’s financial sector already has supported extraordinary levels of growth and itself has been transformed by the region’s rapid rise. But finance needs to follow the example of Asian manufacturing, which has continually evolved toward higher value-added products and more cost-effective processes.
What we are talking about is financial deepening within countries. And that means a shift away from traditional banking practices focused on deposit taking and commercial lending to corporations. Deeper markets can help Asia benefit from new trade opportunities, boost the productivity of growing labor forces in some countries, and support the aging in others.
For consumers, new financial services can provide home mortgages, auto financing, insurance products and pensions—as has occurred in a country like Singapore. For business, innovation means risk capital for start-ups and equity financing for expanding companies. It means expanding the role of bond and stock markets, and enabling institutional investors to provide long-term financing.
Let me be clear: I am not calling for risky financing. Deeper financial systems can provide a shield against volatility, but they must also be well-regulated financial systems. That means remaining vigilant to new sources of systemic risk such as shadow banking.
Integration—Creating Financial Market Synergy
What about deepening of financial interactions among countries? That is where financial integration—the second “i”—comes into play.
Asia has made great strides in creating regional trade linkages that have spurred economic vitality. The region has placed itself at the center of global value chains.
Now the time has come to inject the same vitality into regional financial linkages—to overcome a legacy of fragmented markets and build more synergy among financial institutions and capital markets.
Take the example of ASEAN. This region has a combined population of 600 million people and a GDP equal to $2.5 trillion. Intra-regional trade has grown rapidly, bringing benefits to emerging market and frontier economies alike.
Greater financial integration can advance this process by creating larger and more liquid capital markets that reduce the cost of capital. It can advance intra-regional trade. The proposed ASEAN Economic Community is an important step with its call for harmonized regulations and greater policy coordination. We look forward to watching how this initiative develops.
Infrastructure—Building the Future
Infrastructure represents the third “i”. It is key to Asia’s future. For frontier economies, improved roads, railways, and ports, and new supplies of water and electricity will be building blocks of development. For the emerging markets, livable cities with proper public transport and advanced IT networks can help avoid the “middle income trap.”
The Asian Development Bank estimates that Asia’s infrastructure needs will be $8.3 trillion over the next decade. This requires substantial government funding, so the first step is more and better-targeted public investment. In other words, efficient infrastructure spending. That calls for strengthened fiscal policies—something the IMF can assist with—including careful planning, effective spending controls and improved mobilization of tax revenue.
But public money is not enough. Infrastructure also requires capital markets to provide new sources of private financing—including risk capital from infrastructure funds that can be sold to long-term investors. It requires credit insurance.
That said, private investment—and this does not apply to infrastructure alone—also must be built on the foundation of an attractive business environment. That means improved governance—well-designed and transparent regulations and an intolerance of corruption. This can strengthen the expectation that risk and return will be able to achieve the right balance.
Inclusion—Enabling the Next Miracle
Innovation, integration and infrastructure—these address big picture issues. The fourth “i”—inclusion—represents the human side of development.
For all of the region’s progress, nearly 350 million Asians still live in poverty. Most have no bank accounts. Many businesses have difficulty accessing bank loans and investment capital. Many live in the emerging markets, but are not part of that prosperity.
Financial inclusion is not just a matter of products or regulations. It directly improves livelihoods and reduces poverty. It is the provision of services and the creation of opportunities where there is inequality—inequality of income and gender, education and health. Low levels of financial inclusion in many countries are an obstacle to Asia’s continued success. There are exceptions: Korea has reached virtually 100 percent access to banking for its adult population.
But there is also a business case for promoting financial inclusion. At this conference we will be discussing some of our research on financial deepening and inclusion, and will preview research that we will soon release on the subject. This research shows that greater access to financial services can lead to higher growth, and can be instrumental in advancing financial sector stability. There are some risks, as my colleagues will highlight in their presentation, but the benefits are far more important.
I would add that increasing the access of women to financial services has tremendous economic and social benefits. It is shown to stimulate growth. Moreover—and we have yet another paper coming out on this topic—ensuring that more women have leadership roles in finance could also support financial stability. I would also note that Islamic Finance has the potential to broaden access to finance and deepen the investment pool for long term projects.
I am very impressed with inclusion initiatives that we are seeing across Asia—for example, the government’s commitment to a rapid expansion of financial services to the wider population here in Indonesia, and India’s nationwide program to expand access to bank accounts with biometric identification cards.
Allow me to sum up briefly. Asia’s future development presents a complex set of issues in which the financial sector plays a crucial role. They are crucially connected to Asia’s stable economic progress.
It falls to us to work together to ensure this stability and progress. I hope the knowledge and discussion we share today can deepen our understanding and help us make more effective decisions. Once it is issued, I hope you will find our book on The Future of Asian Finance helpful in further examining these issues. I also promise you that the IMF will bring all of its expertise to bear in this endeavor through our policy advice, research, technical assistance and training.
I am told that in Bahasa Indonesia the phrase “gotong royong” is very commonly used—referring to a community coming together for the benefit of all.
Ladies and gentlemen, this is the spirit in which we need to work together to maintain stability and to ensure Asia’s continued success.
Thank you. Terima Kasih.