ASIAN ECONOMIC INTEGRATION REPORT 2017 THE ERA OF FINANCIAL INTERCONNECTEDNESS: HOW CAN ASIA STRENGTHEN FINANCIAL RESILIENCE? Cyn-Young Park Director of Regional Cooperation and Integration Economic Research and Regional Cooperation Department Asian Development Bank Second Ministerial Conference on Regional Economic Cooperation and Integration: 21-24 November 2017 United Nations Conference Center, Bangkok
Key messages Asia leads the global trade growth recovery; yet structural factors of global trade slowdown still at play Asian financial markets continue to be integrated more globally than regionally 20 years after the Asian financial crisis, Asian policy makers need to remain vigilant, deepen financial reforms, and strengthen regional cooperation for financial regulation and safety nets Rapid financial globalization should be carefully managed; pockets of vulnerability remain while regulatory policy gaps leaving room for a buildup of financial imbalances. 2
Recent data point to a trade recovery Asia s Monthly Trade Value and Volume $ billion 1,000 900 800 700 600 500 400 300 200 100 0 25 20 15 10 5 0 5 10 15 20 Jan 14 Mar 14 May 14 Jul 14 Sep 14 Nov 14 %, y o y Jan 15 Mar 15 May 15 Jul 15 Sep 15 Nov 15 Jan 16 Mar 16 May 16 Jul 16 Sep 16 Nov 16 Jan 17 Mar 17 May 17 Jul 17 Trade value (left) Trade value growth (right) Trade volume growth (right) y-o-y = year-on-year. Note: Asia includes the People s Republic of China; Hong Kong, China; India; Indonesia; Japan; the Republic of Korea; Malaysia; Pakistan; the Philippines; Singapore; Taipei,China; Thailand; and Viet Nam. Source: ADB calculations using data from CEIC; CPB Netherlands Bureau for Economic Policy Analysis, World Trade Monitor. https://www.cpb.nl/en/data (accessed October 2017). 3
Intraregional trade integration deepens Asia s Intra- and Inter-subregional Trade Shares (%) Central Asia East Asia South Asia Southeast Asia The Pacific and Oceania 2000 2010 2015 2016 2000 2010 2015 2016 2000 2010 2015 2016 2000 2010 2015 2016 2000 2010 2015 2016 0 10 20 30 40 50 60 70 80 90 100 Intra-subregion Inter-subregion Rest of the world Source: ADB calculations using data International Monetary Fund. Direction of Trade Statistics (accessed July 2017). 4
Asia s value chain linkage with the global economy slowed Components of Gross Exports (%) 100% a: World 100% b: Asia 90% 90% 80% 66.5 67.1 67.0 80% 61.7 61.3 61.1 70% 70% 60% 2014 2015 2016 PDC RDV FVA DVA GVC partcipation rate 60% 2014 2015 2016 PDC RDV FVA DVA GVC partcipation rate DVA = domestic value added, FVA = foreign value added, RDV = returned value added, PDC = purely double-counted terms. Source: ADB calculations using ADB Multi-Regional Input-Output Tables, and methodology by Wang, Wei, and Zhu (2014). 5
Asia's cross-border assets grow Bank: $3.4 trillion Intraregional: 16.3% Debt: $3.6 trillion Intraregional: 11.9% Bank: $4.4 trillion Intraregional: 21.4% Debt: $4.0 trillion Intraregional: 15.3% 29.4% 21.8% Asia $11.5 trillion 2010 31.4% 17.4% 28.5% 23.3%* $15.6 trillion 2016 25.7% 22.5% FDI: $2.5 trillion Intraregional: 35.3% Equity: $2.0 trillion Intraregional: 24.2% FDI: $3.6 trillion* Intraregional: 39.4%* Equity: $3.5 trillion Intraregional: 19.0% FDI = foreign direct investment; * = data as of December 2015. Notes: FDI assets refer to outward FDI holdings. Bank assets refer to bank claims of Asian economies. Asia includes all 48 ADB regional members for which data are available as of December 2016. Sources: ADB calculations using data from International Monetary Fund. Coordinated Portfolio Investment Survey. http://cpis.imf.org (accessed September 2017); International Monetary Fund. Coordinated Direct Investment Survey. http://cdis.imf.org (accessed February 2017); and Bank for International Settlements. Locational Banking Statistics. https://www.bis.org/statistics/bankstats.htm (accessed May 2017). 6
Financial stress up in response to global and regional shocks Developing Asia Financial Stress Index 2.5 2.0 1.5 GFC 1st Greek bailout Euro crisis Taper Tantrum PRC currency devaluation US Policy Normalization 1.0 0.5 0.48 GFC 0.13 Post GFC Brexit US Fed rate hike 0.0-0.5-1.0 0.15 0.32 Post Pre GFC Normalization -1.5 Jan-00 Mar-01 May-02 Jul-03 Sep-04 Nov-05 Jan-07 Mar-08 May-09 Jul-10 Sep-11 Nov-12 Jan-14 Mar-15 May-16 Jun-17 Episodes FSI Average FSI Note: Based on principal components analysis. Includes People's Republic of China; Hong Kong, China; India; Indonesia; Rep. of Korea; Malaysia; Philippines; Singapore; Thailand; Viet Nam Source: ADB calculations using data from Bloomberg, CEIC, and Haver Analytics (all accessed September 2017). 7
The Era of Financial Interconnectedness: How Can Asia Strengthen Financial Resilience? 8
Key lessons drawn from past crisis experiences Rapid financial globalization timing and sequencing of financial liberalization should be carefully managed; Maintaining sound macroeconomic fundamentals is a prerequisite for economic and financial resilience; Deepening and broadening financial systems is essential to boosting both financial efficiency and resiliency; Greater regional cooperation efforts are needed to reinforce regional financial safety nets for financial resilience. 9
Asia s financial health improved but pockets of vulnerability remain Significant challenges remain, along with unresolved financial market and system weaknesses. Remaining regulatory policy gaps also leave room for a buildup of financial vulnerability. Asia s policy makers must remain vigilant, while continuing to deepen financial reforms. 10
Structural weaknesses remain Limited capital market-based financing solutions such as longterm local currency bond markets Continued heavy reliance on foreign currency- (US dollar-) denominated debt Corporate Financing as % of GDP Emerging Asia (excluding HKG and SIN) Share of outstanding international debt securities denominated in US dollars (in %) Pre- AFC vs. latest 120 100 80 60 40 20 0 1996 2006 2016 Corporate Bonds Stock Market Capitalization Bank Credit 2017Q1 100 100 PHI 90 MAL IND INO KORAvg 80 THA PRC 70 60 50 40 40 50 60 70 80 90 100 11
Recent trends to signal financial fragility Rising private-sector debt and leverage combined with the rapid growth of shadow banking increase financial fragility Deteriorating bank asset quality can have potential macrofinancial feedback effects Credit to Private Sector Selected Asian Economies (% of GDP) Deviation of Credit-to-GDP from Long-Run Trend (%) 350 60 300 250 40 200 150 20 100 0 50 0-20 -40-60 12/95 09/96 06/97 03/98 12/98 09/99 06/00 03/01 12/01 09/02 06/03 03/04 12/04 09/05 06/06 03/07 12/07 09/08 06/09 03/10 12/10 09/11 06/12 03/13 12/13 09/14 06/15 03/16 12/16 2006Q2 2016Q4 2006Q2 2016Q4 2006Q2 2016Q4 2006Q2 2016Q4 2006Q2 2016Q4 2006Q2 2016Q4 2006Q2 2016Q4 2006Q2 2016Q4 2006Q2 2016Q4 PRC HKG INO IND JPN KOR MAL SIN THA Households Non financial corporations PRC IND KOR INO MAL THA Source: Bank for International Settlements (accessed September 2017) 12
NPL ratios picking up in some Asian economies Bank Nonperforming Loans (% of gross loans) Economy 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Central Asia Afghanistan 49.9 4.7 5.0 4.9 7.8 12.1 15.2 Armenia 6.0 8.0 17.5 24.4 9.9 5.4 2.1 1.9 2.4 2.4 4.3 4.9 3.0 3.4 3.7 4.5 7.0 7.9 9.3 Azerbaijan 28.0 21.5 15.1 9.5 7.2 3.5 4.7 6.0 5.7 4.5 4.4 5.3 Kazakhstan 11.9 8.4 4.3 3.3 2.4 2.7 7.1 18.9 20.9 20.7 19.4 19.5 12.4 8.0 7.9 Kyrgyz Republic 10.1 30.9 30.9 13.4 13.3 11.2 8.0 6.2 3.6 5.3 8.2 15.8 10.2 7.2 5.5 4.5 7.1 Tajikistan 11.3 4.8 5.4 9.6 7.4 7.2 9.5 13.2 20.4 19.1 East Asia Korea, Rep. 5.8 7.4 8.3 8.9 3.4 2.4 2.6 1.9 1.2 0.8 0.7 0.6 0.6 0.6 0.5 0.6 0.6 0.6 Mongolia 7.2 17.4 11.5 5.8 4.2 5.3 5.0 7.5 8.5 PRC 28.5 22.4 29.8 26.0 20.4 13.2 8.6 7.1 6.2 2.4 1.6 1.1 1.0 1.0 1.0 1.1 1.7 1.7 South Asia Bangladesh 40.7 41.1 34.9 31.5 28.1 22.1 17.5 13.2 12.8 14.5 5.8 9.7 8.6 9.4 8.4 India 15.7 14.4 14.7 12.8 11.4 10.4 8.8 7.2 5.2 3.5 2.7 2.4 2.2 2.4 2.7 3.4 4.0 4.3 5.9 7.6 Maldives 20.9 17.6 17.5 14.1 11.1 Pakistan 20.7 19.5 22.0 19.5 23.4 21.8 17.0 11.6 9.0 7.3 7.4 9.1 12.2 14.7 16.2 14.5 13.0 12.3 11.4 11.1 Southeast Asia Indonesia 48.6 32.9 34.4 31.9 24.0 6.8 4.5 7.3 5.9 4.0 3.2 3.3 2.5 2.1 1.8 1.7 2.1 2.4 3.0 Malaysia 4.1 18.6 16.6 15.4 17.8 15.9 13.9 11.7 9.4 8.5 6.5 4.8 3.6 3.4 2.7 2.0 1.8 1.6 1.6 1.7 Philippines 4.7 12.4 14.6 24.0 27.7 14.6 16.1 14.4 10.0 7.5 5.8 4.6 3.5 3.4 2.6 2.2 2.4 2.0 1.9 2.0 Thailand 42.9 38.6 17.7 11.5 16.5 13.5 11.9 9.1 8.1 7.9 5.7 5.2 3.9 2.9 2.4 2.3 2.3 2.7 2.9 Notes: White cells denote a nonperforming loan ratio below 5%, yellow between 5% and 10%, and orange above 10%. Blank cells indicate data are unavailable. Sources: ADB calculations using data from Bank of Mongolia; and World Bank. World Development Indicators (accessed October 2017). 13
New challenges to Asia s financial stability Asian financial markets have grown more interconnected both intra-regionally and across the globe over the past 20 years; A more interlinked global banking network can spur the transmission of financial risk from advanced to emerging economies; A buildup in NPLs can yield macro-financial feedback effects, with possible spillover effects in increasingly interconnected financial markets. 14
Asian financial markets have become more interconnected regionally and globally 15
A heightened financial interconnectedness can transmit shocks across borders Impact of direct and indirect banking exposures to the crisisaffected countries on capital outflows during the GFC Variables Without Control Variables (1) Outflows (2) Outflows (3) Outflows With Control Variables (4) Outflows Direct exposure of banking sector 0.257*** (0.075) 0.282*** (0.078) 0.228** (0.085) 0.253*** (0.086) Indirect exposure of banking sector 0.722** (0.285) 0.359 (0.269) *** = significant at 1%, ** = significant at 5%. Robust standard errors in parenthesis. Coefficients for the control variables are not shown for brevity. Source: Park and Shin (2017). 16
Buildup of NPLs can affect real sector and spill over through macrofinancial linkages Macrofinancial feedback effects: Empirical findings show that an increase in NPLs leads to a reduction in credit supply, a rise in unemployment, and slowdown in overall economic activity Systemic implications: NPL shocks can transmit across borders through macrofinancial linkages Estimated Impulse Response Functions to a Shock in the NPL Ratio Source: Lee and Rosenkranz (2017) 17
Policy considerations for enhancing financial resilience A key lesson drawn from recent crises is the urgent need to strengthen macroprudential regulation and supervision Further developing local currency bond markets across the region is key to enhancing financial resilience and mobilizing long-term finance Growing regional banking activities and institutions possibly of systemic importance underpin the need to discuss regional regulatory cooperation, including resolution mechanisms for interconnected regional banks The region should consider reviewing and strengthening existing financial safety nets against potential contagion and spillover effects 18
Thank You! 19