Governor’s Statement
Speeches
07 May 2000
Governor’s Statement
Joseph Yam, Alternate Governor, Hong Kong, China
(Speech at the 33rd Asian Development Bank Annual Meeting, 6 - 8 May 2000, Chiang Mai, Thailand)
- Mr President, I would like first to express my gratitude to the
people and Government of Thailand for their generous hospitality in
hosting this year's Annual Meeting of the Asian Development Bank. I
would also like to thank the Bank's management and staff for the
excellent arrangements for this meeting.
- Mr President, notwithstanding the devastating Asian financial
turmoil of 1997-98, the development record of Asia in recent times
has been impressive. The Asian Development Bank has played an
important role in making this impressive record possible and I
must, in this first Annual Meeting of the Bank in the new
millennium, record my appreciation of the good work that the Bank,
since its establishment, has done for our region.
- But like everything else, and everybody else, the Bank could
have done even better for Asia had it been able to foresee, and
promote policies capable of pre-empting the financial crisis which
has brought so much suffering and disruption to the region. In our
enjoyment of the Asian miracle, we, whether within or outside the
region, were all oblivious of the risks associated with the
explosion of international finance that we have recently been
experiencing. But as markets attained a global dimension,
encouraged by financial liberalisation and the advance of
information technology, they became far less tolerant of weaknesses
than before, and the markets responded to weaknesses with harsh
punishments, which many considered grossly unfair.
- But this is the reality that we face. And if we are to continue
to benefit from the greatly enhanced efficiency of global financial
markets in international financial intermediation - a process that
has contributed so much to development - we have to get on with the
necessary reforms. These include the domestic structural reforms to
the financial and corporate sectors, to make sure that we can
manage the risks and cope with the volatility that are part of that
efficiency. And, to the extent that consensus can be reached, they
also include measures to strengthen the international financial
architecture.
- Thus, with some encouragement from the Bank and from others,
and more importantly, urged on by the brute forces of the market,
significant progress has been made in the domestic structural
reforms of individual economies in the region. I applaud the
progress and the achievements; and I sympathise with the pain and
suffering which they have entailed. With the economic recovery of
the region now well under way and international funds flowing back
into the region, I would also urge a continued commitment to
structural reforms and caution against complacency. It must be
recognised that structural reforms, and specifically financial
sector reform, is of crucial importance if this recovery is to be
turned into sustainable economic growth. A bank with the mandate to
promote development in Asia must surely have a role to play in all
this and I look forward to greater involvement of the Bank, in
whatever capacity, in maintaining the momentum of structural
reforms in Asia.
- Mr President, the efficiency of financial markets in the region
in performing the important function of financial intermediation
has been found lacking. There has been notably little disagreement
about the desirability of developing domestic and regional bond
markets. But there has also been little progress. And there has
been no lack of explanation of why this is the case. The often
quoted impediments include the lack of clearing and settlement
infrastructure, the absence of a broad institutional investor base,
the lack of a benchmark yield curve, low liquidity, and so on.
While these impediments are recognised and are being tackled
earnestly by national authorities, there is one problem that has
attracted relatively little attention so far. The problem relates
to the generally low credit ratings of the Asian issuers, including
the sovereigns, granted by the international rating agencies.
- I do not wish to provoke a debate on the objectivity and
reliability of the ratings and the rating process of the
international rating agencies. The reality is that many Asian
governments and corporations receive credit ratings that are lower
than the minimum thresholds acceptable to institutional investors,
including the managers of official reserves. There is certainly
merit in strengthening the dialogue between the Asian issuers and
the international credit agencies to facilitate a better
understanding of the Asian situation by the rating agencies and
improve the transparency and accountability of the rating process.
There is also a case for considering whether it is advisable or
viable to establish national or regional credit rating agencies,
with or without support from the authorities. On top of these, I
think there is a need to consider the introduction of market-based
mechanisms for credit enhancement or guarantees.
- In Asia, I am aware of problems encountered by private sector
initiatives in this field. It has proved difficult objectively to
assess and manage the risks involved in such operations. Indeed,
one feature of the recent explosion of international finance is
market volatility that has been much higher than had been thought
possible in the light of historical experience. But I think we have
learnt from the recent years of financial turmoil and I hope we are
now in a better position to identify and therefore properly price
the risks involved in the provision of credit enhancements or
guarantees. What, for example, the Bank and the Miyazawa Plan have
achieved in the provision of credit guarantees to several sovereign
bond issues after the outbreak of the financial crisis could also
be achieved and expanded through market based arrangements.
- Credit enhancement is quite common in the developed markets. In
the US, the credit guarantee companies were insuring around
US$278.5 billion of debt securities at the end of 1998. The
availability and use of credit enhancement facilities have become a
basic ingredient of mature bond markets. It will be useful to
examine how this could be promoted in the region. This promises to
give a much-needed boost to the development of the bond market in
the region.
- Mr President, let me end by expressing confidence that the
Bank, under your leadership, will be able to play a more pivotal
role in the development of Asia as it steps into a new era in which
technology presents an abundance of opportunities as well as
risks.
