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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