Progress on Regional Integration and Connectivity

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1 2015/SFOM13/004 Session: 1 Progress on Regional Integration and Connectivity Purpose: Information Submitted by: ADB 13 th Senior Finance Officials Meeting Bagac, Philippines June 2015

2 APEC Senior Finance Officials Meeting June 2015 Bagac, Bataan, Philippines Progress on Regional Integration and Connectivity Session 1: GLOBAL ECONOMIC AND FINANCIAL OUTLOOK, GROWING INEQUALITY AND REGIONAL CONNECTIVITY/INTEGRATION Arjun Goswami Director, Regional Cooperation and Integration Division Economic Research and Regional Cooperation Department Asian Development Bank 1 Economic Research and Regional Cooperation Department

3 Outline for the Presentation ADB Economic Outlook for Developing Asia Promoting Financial Resilience and Stability Investing in Regional Infrastructure 2 Economic Research and Regional Cooperation Department

4 Economic outlook: Developing Asia extends steady growth GDP growth (%) f: forecast f 2016f 3 Economic Research and Regional Cooperation Department

5 Potential risk of capital flow reversal 4 Economic Research and Regional Cooperation Department

6 Tools to promote stability Domestic tools Structural reforms financial resilience and for efficient and well-regulated financial systems Macroprudential policy and capital flow measures Improving financial inclusion Lowering the cost of sending remittances Regional tools Developing local currency bond markets Strengthening regional financial safety nets Cooperation in managing natural disasters management 5 Economic Research and Regional Cooperation Department

7 Improving financial inclusion Financial Inclusion Individuals, 2011 (Account at a formal financial institution, % age 15+) Financial Inclusion Enterprises, 2011 (% of SMEs with an outstanding loan or line of credit) Note: PRC = People s Republic of China; SMEs are defined as enterprises with 5-99 employees. Source: G20 Financial Inclusion Indicators Database. Economic Research and Regional Cooperation Department

8 Lowering the cost of sending remittances CAP: promotes remittance cost reduction (global average cost is 7.7% of amount transferred) Developing APEC receives $135bn remittances annually in the past 5 years Governments and central banks could make payment systems more efficient to reduce costs ADB knowledge events for policy discussions on lowering the cost of sending remittances 7 Economic Research and Regional Cooperation Department

9 Developing capital markets CAP: includes development of capital markets to enhance financial resiliency As witnessed during the 1997/98 Asian financial crisis, the region is highly vulnerable to sudden reversal of capital inflows. ASEAN+3 Asian Bond Markets Initiative has contributed in: Developing an alternative to short-term foreign debts and strengthen the mobilization of regional savings for long-term investment Nurturing bond market development and integration Raising awareness among policymakers on the benefits of broader and more diversified investor base Promoting use of LCY bonds to finance long-term infrastructure projects to avoid currency and maturity mismatches 8 Economic Research and Regional Cooperation Department

10 Creating disaster risk financing insurance schemes and CAP: build deeper financial markets to absorb shocks better APEC is prone to natural disasters; cost of damages reached $1.2tn over the past 10 years Issues: Cataloguing of disaster risk models Risk mapping Risk financing options Regional disaster risk financing mechanisms Caribbean Catastrophe Risk Insurance Facility Pacific Catastrophe Risk Insurance Pilot 9 Economic Research and Regional Cooperation Department

11 Developing Asia s infrastructure needs are large National Infrastructure Needs in DevelopingAsia (2008 $, billion, ) Source: ADB and ADBI (2009). 10 Economic Research and Regional Cooperation Department

12 Promoting local currency bonds for infrastructure finance CAP: developing LCY bond markets could help promote financial integration and accelerate infrastructure development Since 2010, emerging East Asian LCY bonds outstanding expanded 13% annually reaching $8.2 trillion at the end-2014 Significant portion of ASEAN LCY bonds are issued by infrastructurerelated entities: PHI (20%), SIN (25%), VIE (18%) State-owned infrastructure-related companies rank among the largest corporate bond issuers across the region Credit Guarantee and Investment Facility (CGIF), established in 2010, provides guarantees for LCY bonds issued by companies within the region So far, issued 7 guarantees amounting to a total of $645 million 11 Economic Research and Regional Cooperation Department

13 Promoting PPPs for infrastructure financing CAP: attracting private sector capital through PPPs to deliver crucial infrastructure Out of the close to $1 trillion per year infrastructure financing gap for , the private sector is expected to contribute 40%. Some preconditions for private infrastructure investment Bankable projects that can attract private investors Appropriate financial instruments and risk-sharing arrangements Investor protection laws Transparent and predictable regulatory framework ADB s new office to provide independent PPP transaction advisory services Economic Research and Regional Cooperation Department

14 Infrastructure for urban development CAP: supports infrastructure development and financing with focus on urban development and regional connectivity Urban population in APEC is projected to increase rapidly from 1.8bn in 2013 to 2.4bn by 2050 APEC economies adopt various models of city expansion (vertical, horizontal/radial, linear) Connecting urban economic hubs enables mobility and increases efficiency of the supply-chain of goods and services ADB can support APEC in developing cities by sharing: Cases of sustainable urban development models Financing options for urban development and service provision Regional connectivity models that link economic hubs 13 Economic Research and Regional Cooperation Department

15 Key messages Developing Asia maintains steady economic growth. To sustain growth, financial resiliency and infrastructure development are important for developing Asia as part of APEC. Financial resilience requires domestic reforms and regional cooperation. Domestic tools: (i) structural reforms for more efficient financial systems, (ii) macroprudential policy and capital flow measures, and (ii) promoting financial inclusion. Regional cooperation is needed to develop the local currency bond market, strengthen financial safety nets, and manage natural disasters. Infrastructure needs in Developing Asia are big. New methods of mobilizing savings and capital could be utilized such as PPPs and investment in local currency bonds Urban sector development is vital Economic to regional Research connectivity. and Regional Cooperation Department

16 ThankYou! Arjun Goswami Asian Development Bank 15 Economic Research and Regional Cooperation Department