'Strong economic fundamentals needed'

The most pressing challenge confronting policy-makers in crisis-affected economies is to develop an optimal policy mix to address fiscal imbalances and the impaired financial sector, and structural adjustments to enhance competitiveness, said governor of Malaysia’s central bank Zeti Akhtar Aziz.

At the same time, the Bank Negara governor added, the policy-makers have to be able to reduce adverse impact which the policies have on the economy.

She said while there was a general consensus that fiscal consolidation and structural adjustment were necessary to regain competitiveness and sustainable growth in the future, in the immediate term it would involve costs to the economy.

As the experience in previous crises had shown, including during the Asian Financial Crisis, there were threshold levels that when breached the economy would be pushed into an even deeper recession, she said in her keynote address entitled “Growth and stability – implications and priorities for Asia” at the Institute of International Finance (IIF) Annual Membership Meeting 2012 in Tokyo on Saturday.

This would in turn increase the cost of the resolution of the crisis and result in an even more prolonged period of weakness, said Aziz, adding that the concern was also the potential huge financial and social costs.

She pointed out that Asian experience during the financial crisis in the late 1990s had also shown that the potential for effective results was enhanced when the policy package was comprehensive.

“Financial restructuring and repair, fiscal consolidation and structural adjustments have their best chance to yield results in an environment in which there is some economic growth,” added Aziz.

Another challenge is how policy coordination may be improved, both within and across borders, to maximise the impact of policy measures while minimising the unintended spillovers on other parts of the economy or financial system and across borders.

“Strong fundamentals in Asia will continue to support our prospects in this more challenging environment. Following the Asian financial crisis, several emerging economies in Asia have strengthened their economic and financial fundamentals, improved their fiscal and external debt positions, and reformed their banking sectors. This has yielded tremendous payoffs,” she added. Aziz also said that Asia’s development agenda formed a key part of the efforts to firmly anchor the future growth.

First, is the further financial deepening in the Asian economies through the development of market-based and diversified channels of intermediation to support the region’s economic transformation. Since the Asian financial crisis, Asia has already made significant progress in this direction, in particular, in the progress and growth of the capital markets. Across Asia, the development of the financial system also continues to be pursued with vigor.

Looking ahead, she said the next phase of Asia’s transformation would see a rising and more affluent middle income population.

“There will also be massive investments required for infrastructure and development and for a higher contribution to growth by small and medium businesses.

“This will substantially increase demand for a wider spectrum of high quality financial products and services. The strategy is also for the intensification of financial deepening in Asia to meet the increased demands of domestic investors in the management of their surplus funds,” said Aziz.

A large part of Asian funds are still intermediated through the global financial markets and then recycled back into Asia. This increases Asia’s exposures to volatile capital flows. Second is the strengthening of financial linkages and connectivity, within the Asian region, and between Asia and other economies including other emerging economies.