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An Asian perspective on development and
opportunities for the region
– A Regulator’s perspective
“Savings banks: the retail gateway to a global market.
Driving sustainable development”
Dato’ Zamani Abdul Ghani,
Deputy Governor, Malaysia Central Bank
21 – 22 September 2006, Kuala Lumpur
An Asian Perspective on
Development and Opportunities
for the Region
- A Regulator’s Perspective –
Datuk Zamani Abdul Ghani
Deputy Governor, Bank Negara Malaysia
2
Outline of Presentation
Resilient Regional
Growth Outlook
Fastest growth region despite various
shocks
A More Difficult
Environment Going
Forward
Slowdown in US
High commodity prices
Adjustment in electronics sector
Increasing competitive pressures
Internal growth engine:
Rising intra-regional trade
Seizing Opportunities
Tapping opportunities from China
Develop new domestic demand
Develop new growth areas:
Islamic finance
Greater regional financial
integration and initiatives
3
Asia is the fastest growing region in the world
Real GDP: East Asia ex-Japan vs World
Annual growth, %
12
Asian
Crisis
10
East Asia
(ex-Japan)
8
6
World
4
2
0
1990
1992
1994
1996
1998
Source: IMF
4
2000
2002
2004
2006
Strong performance driven by trade expansion
From 1985-’05, exports grew 12fold…
…while share of world exports
doubled
East Asia’s share of world exports (%)
Export index
28
1100
26
24
900
1985=100
26%
East Asia
21%
22
700
21%
20
East Asia (ex – Japan)
18
500
East Asia (ex – Japan)
16
14
300
World
12%
12
100
10
1985
1990
1995
2000
1990
2005
Source: IMF, WTA
5
1995
2000
2005
Strong trade & capital inflows contribute to
large accumulation of reserves
East Asia: Share of world reserves
70
Share (%)
60
East Asia
50
40
30
East Asia
ex-Japan
20
10
0
1990
1995
2000
Source: IMF
6
2004
2005
Continued recovery & increasing openness of Japan
and China to benefit regional trade further
%
%
Japan: Total Trade as % of GDP
China: Total Trade as % of GDP
80
25
70
20
60
50
15
40
10
30
20
5
10
0
0
2000
2001
2002
2003
2004
2000
2005
Source: WTA
7
2001
2002
2003
2004
2005
Outline of Presentation
Resilient Regional
Growth Outlook
I. Slowdown in US
A More Difficult
Environment Going
Forward
II. High commodity prices
III. Adjustment in electronics
sector
Seizing Opportunities
IV. Increasing competitive
pressures from China
8
I. US consumer spending to slow
US Retail Sales
10
9
•
slowing housing market
7
6
•
5
Higher interest rates to
curb consumer borrowing
4
•
3
2
Higher oil prices affecting
purchasing power
1
May
Jan-06
Sep
May
Jan-05
Sep
May
Jan-04
Sep
May
0
Jan-03
Annual change (%)
8
Weaker wealth effect from
Source: National authorities
9
Developments in the US economy will affect world
economic performance
Annual change (%)
8
1973: First oil
crisis
6
1980-81:
Second oil
crisis
1990: Savings &
Loan crisis in US
2000: Dotcom
bubble bursts
1991: Gulf war
World real GDP
4
2
US real GDP
-2
-4
10
20
02
19
98
19
94
19
90
19
86
19
82
19
78
19
74
19
70
0
II. High commodity prices
High oil prices
USD p/b
Dependent on Exports of Nonfuel Commodities
85
75
65
55
WTI
1-month
Futures
45
35
25
01/07/2003
01/07/2004
01/07/2005
01/07/2006
Benefits:
Risks:
• High domestic income from
• Higher input costs may induce
export earnings
inflationary pressures
11
Higher oil prices : Second-round effects
Annual change, %
10
Regional CPI & PPI*
PPI
8
Potential for second-round
effects given:
6
• Stronger growth of PPI
compared to CPI
4
CPI
• Higher trend in core inflation
• Complete/ partial removal of
2
fuel subsidies
0
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
* Consumer price index & producer price index are calculated as averages of 9 East Asian countries
12
Challenges: Managing rising inflation
Tighter monetary policy and stronger economic fundamentals
Globalisation of production to moderate price pressures
Improved profit margins have increased capacity of firms to
absorb cost
Global investment recovery to sustain productivity and
boost capacity
Increased energy efficiency
13
III. Adjustment in E&E exports
Annual change,
30
%
Regional E&E exports
25
• Weaker US demand
20
• Inventory adjustment
after World Cup
15
10
5
0
Jan 2005
May 2005
Sep 2005
Semiconductor sales
forecast (yoy%)
Jan 2006
May 2006
2006 f/
2007 f/
Earlier
Current
Gartner
9.5
10.6
7.0
WSTS
8.0
10.1
11.0
SIA
7.9
9.8
10.5
Average
7.8
10.2
9.5
14
IV. China is emerging as a strong competitor
in the region
Share of E&E exports as % of total world E&E exports
20
2001
2005
10
7.3
6.4
5.8
4.4
3.7
1.9
1.4
15
Philippines
Thailand
Malaysia
Taiwan
Korea
Singapore
Hong
Kong
0
China
Share (%)
15.7
China sets to be No.1 semiconductor producer
by 2007
Top exporters of semiconductors
Rank
Share
2004
2007f
2004
EU-25
1
2
18%
US
2
4
15%
Singapore
3
3
14%
rate of 56% (world: +19%),
China (+HK)
4
1
13%
would make them No.1
Japan
5
5
12%
producer by 2007
Taiwan
6
7
8%
Korea
7
6
7%
Malaysia
8
8
7%
• Currently, No.4 if include Hong
Kong
• China’s strong export growth
Source: WTO, BNM calculations
16
China: Interior development strategy to further
boost exports & consumption
Interior
Development
Strategy
…while higher
wages push
coastal cities
up the value
chain
Labour-intensive
industries move
into interior regions:
• Increase production capacity
• Encourage rural consumption
17
China expanding across value chain
US imports from China
(1992 vs 2005)
300
Going forward, high-tech
exports to grow:
250
•
USD billion
200
150
Low penetration rates in
global markets
New varieties
• Significant cost advantages
Trade in 1992
varieties
• High profit margins provide
incentives for expansion
100
• Less vulnerability to wage
increases
50
0
1992
2005
Source: World Bank
18
Outline of Presentation
Resilient Regional
Growth Outlook
A More Difficult
Environment Going
Forward
I. Internal growth engine:
Rising intra-regional trade
Seizing Opportunities
III. Develop domestic demand
II. Tapping opportunities
from China
IV. Develop new growth areas:
Islamic finance
V. Greater regional financial
integration and initiatives
19
I. Opportunities : Promoting intra-regional trade
Intra-regional exports (% of total exports of the region)
Share, %
50
50
with Japan
42
39
40
ex-Japan
31
30
20
10
0
1990
1995
2000
20
2004
Factors underpinning strong intra-regional trade
performance…
• Reduction of tariffs and trade barriers
• Openness to FDI
• MNCs : Production supply chain
• Improved trade financing and cross-border capital flows
• Growth of domestic demand
• Growing economic complementarities
• Regional integration efforts
21
II. Tapping opportunities from China: Investment
China’s “going abroad” policy brings opportunities for the region
US$ mn
8000
Units
China : Overseas non-financial
direct investment &
No.of Enterprises
1200
•
Outward Investment
7000
investment overseas in 2005
1000
No. of Enterprises (RHS)
China’s non-financial direct
6000
grew 25.8%, (total: USD6.92
800
billion, mainly to Asia)
5000
4000
600
•
Main areas of investment:
resource-based industries, to
3000
400
2000
200
1000
0
0
1991
1993
1995
1997
1999
2001
2003
2005
22
support demand for raw
materials
Tapping opportunities from China: Tourism
Outbound tourism from China has increased, with rising shift
towards leisure travel
Millions
35
Leisure
30
Business
25
20
15
10
5
0
1994
1995
1996
1997
1998
1999
23
2000
2001
2002
2003
2004
2005
III. Opportunities : Strengthen domestic demand
– Higher contribution of consumption
•
•
•
•
•
Supportive financial environment
Favourable demographics
Expansion in intra-regional trade
Flexible exchange rate regime and appreciation of Asian currencies
Lack of social safety nets a constraint
– Reviving investment
•
•
•
•
•
Low investment rates
Infrastructure development
FDI inflows
More efficient financial intermediation
Liberalisation of outward investments
24
In view of the potential for SMEs as
a new source of domestic demand,
the promotion of the microfinance
industry is important
25
Opportunities for Achieving Sustainable
Microfinance Industry in the Region
Importance of Microfinance
Potential Opportunities
• Curtail directed credit
programmes
• Foster greater economic
development through financial
inclusion
• Encourage development of
conducive regulatory and
supervisory framework
• Achieve balance and equitable
growth
• Intensify ICT advancement for
greater innovation
• Alleviate poverty
• Broaden the range of
microfinance products and
services
26
Developing a Sustainable Microfinance Industry
in Malaysia
Objective:
• Develop a diversified and inclusive financial system that supports wider economic
development and the needs of all segments.
Rationale:
• Enhance access to financing for SME by meeting the financial needs of micro
enterprises.
 80% (412,000) of SMEs are micro enterprises and that only 13% relied on formal
financial institutions for funding.
Key Focus:
• Development financial institutions to provide sustainable microfinance.
• Banking sector to play a role in microfinance.
Supporting Infrastructure
• Development of an infrastructure to share credit information of microfinance borrowers.
27
IV. Opportunities : Develop new growth areas
ASEAN: Finding niche
among the giants …
Thailand:
Automotive,
Agro business
Philippines:
Outsourcing
Singapore:
Malaysia:
Resource-based
industries,
Islamic finance,
Shared services/
outsourcing
Financial Hub,
Biotech &
Pharmaceutical
28
Malaysia’s
experience in
developing Islamic
finance
Malaysia as an Islamic Financial Centre
– The Envisioned Landscape -
Centre for education & training
excellence
Diversified Players
• Strong IFIs with onshore &
offshore capabilities
• Presence of large & diversified
range of global players
• Significant presence of
Malaysian IFIs abroad
• Active financial markets
Centre for Islamic finance
activities:
• Origination, issuance & trading
of Islamic financial instruments
•Fund & wealth management
• Offshore Islamic financial
products & services
•Takaful & retakaful
MALAYSIA
Talents
•Large pool of highly skilled & competent IBF expertise
•Presence of international professional firms
(legal, auditing, advisory) with right skill sets
29
Islamic finance in Malaysia…moving from
domestic to the global stage
Promote international trade
and investment flows
Promote
international
prudential
and
supervisory
standards IFSB
Promote foreign equity
participation in domestic
Islamic financial institutions
FINANCIAL LIBERALISATION
& GLOBAL INTEGRATION
Promote issuance of
sukuk by multilateral
development banks
Spur financial innovation
and enhance product
diversity
30
Enhance greater
Shariah
harmonisation
Create pool of
competent and
skilled human
talent
V. Opportunities: Promoting regional financial integration
Asia has huge potential
• Growing cross-border investments within Asian region
• High savings for financial intermediation
• Growing trade in final products
• Liberalisation of financial markets and capital flows
• Large population and growing middle class – untapped market
for financial services
• Current financial cooperative initiatives form basis for deeper
integration
31
Intra-regional portfolio Investment
2004 Cross-Border Total Portfolio Flows (%)
Source
NAFTA
EU15
East Asia
ex-Japan
NAFTA
15.1
17.6
19.1
EU15
45.0
64.1
30.6
East Asia
15.0
5.0
20.4
East Asia ex-Japan
5.5
1.8
17.4
Japan
9.5
3.2
3.0
Rest of the World
24.9
13.2
30.0
Total Global
100.0
100.0
100.0
Destination
Calculations based on the Comprehensive Portfolio Investment Survey 2004, IMF
32
Intra-regional investment in bonds
2004 Cross-Border Flows in Long-Term Debt Securities
Investment from East Asia ex-Japan
Destination
USD billion
% of total
NAFTA
81
30.6
EU15
83
31.5
East Asia
40
15.1
East Asia ex-Japan
34
12.9
Japan
6
2.2
Rest of the World
60
22.7
Total Global
265
100.0
*Numbers may not add up due to rounding
Calculations based on Comprehensive Portfolio Investment Survey 2004, IMF
33
Intra-regional investment in equities
2004 Cross-Border Portfolio Flows in Equities
Investment from East Asia ex-Japan
Destination
USD billion
% of total
NAFTA
28
10.3
EU15
69
25.8
East Asia
65
24.3
East Asia ex-Japan
56
20.9
Japan
9
3.4
Rest of the World
106
39.6
Total Global
268
100.0
Calculations based on the Comprehensive Portfolio Investment Survey 2004, IMF
34
Similar trends in banking flows
Foreign banks’ claims on Asia by origin, as of 1Q ‘06
(in % of total, BIS reporting banks)
100%
Others
90%
(including
Asia ex-Japan)
80%
70%
Japan
60%
50%
40%
US
30%
20%
Europe
10%
0%
China
Source: BIS
Indonesia
Korea
Malaysia
35
Philippines
Taiwan
Thailand
Benefits of greater Asian financial integration
Improved efficiency in
allocation of capital
Greater stability of financial prices,
more liquid markets, higher savings
returns, lower funding cost
Meet increasing institutional
investors’ demand for financial
assets
More products, opportunities for
yield pick-up, better risk
management, geographical
diversification
• Deeper regional financial markets
• More developed financial systems
• Greater competition and efficient pricing of capital
Enhanced economic growth
36
In view of the potential to further enhance
mutually reinforcing growth, Asian authorities
are undertaking various measures to promote
greater regional financial integration …
37
Intensification of financial cooperation in many areas
ASEAN
ASEAN+3
APEC
EMEAP
SEANZA
Surveillance
√
√
√
√
√
Financial arrangements
√
√
Financial market development
√
√
Capital Account Liberalisation
√
Financial Services Liberalisation
√
√
√
Financial regulation/supervision
Insurance cooperation
APG
√
Payment & settlement systems
Training & capacity building
√
Currency/monetary cooperation
√
Anti money laundering
√
√
√
√
√
√
√
√
√
√
√
√
Malaysia’s participation in
combating money laundering
38
BNM’s participation in combating money laundering
Money laundering through the financial system
would undermine confidence in the system
• Bank Negara Malaysia is appointed as Competent Authority under
the Anti-Money Laundering Act (AMLA) to carry on the functions of:
– Criminalising money laundering
– Provides for actions that deters and detects money laundering
and terrorism financing
– Provides for the freezing, seizure and forfeiture of proceeds
derived from ML/TF activities
• Regional participation: Malaysia is a member of the Asia/Pacific
Group on Money Laundering, the Egmont Group of Financial
Intelligence Units and involved in cross-border co-operation on
exchange of information.
39
Way forward for Asian financial integration…
Greater recognition of financial sector in fostering more
rapid growth
Step-by-step approach but pace can be speeded up
Given economic, political and cultural diversity of
Asia, consensus building is necessary
Identify areas of common interest and address the
issue of different levels of economic and financial
development among regional countries
40
Concluding remarks
Challenges facing regulators:
•
Increasing vulnerabilities arising from the changing global
environment - macro-economic, financial markets, industry
and competitive shifts.
•
Harnessing the benefits of globalisation while minimising
risks
•
Need to develop more efficient, competitive, resilient &
innovative financial system
•
Achieve macroeconomic stability and preserve confidence
41
Thank you
42