Published Date: 09 May 2007

Opening Keynote Address by Mr Heng Swee Keat. Managing Director of Monetary Authority of Singapore. Merrill Lynch Pan-Asia Rising Stars Conference, The Ritz Carlton Millenia, 9 May 2007

Asia: Moving Up and Stepping Out

1   Good morning. It is my pleasure to address this constellation of Asian corporate rising stars and key players in the region's capital markets.  I thank Merrill Lynch for holding the conference here in Singapore and inviting me for this conference.

2   This conference is timely.  Almost 10 years ago, the Asian Financial Crisis threw the regional markets and economies into turmoil.  Overnight, Asian dragons and tigers became seen as ailing puppies and kittens.

3   Today, Asia's economies are on the march again. China, India and more recently Vietnam, have justifiably captured headlines with their sizzling economic growth.  Indeed, Asia as a whole has put up a stellar performance. The Japanese economy has revived; average growth rate for Southeast Asia was 5.7%, led by Singapore and Malaysia with 6.6% and 6.0% , respectively.  Asia's stock markets, especially in China and India, have grown strongly, and are setting record highs.  Corporate profitability and balance sheets are much stronger than a decade ago. The banking system in the region has become more robust - for example non-performing loans for the Asean-5 have fallen from 10.6% in 1997 to 4.6% in 2006. 

4   The mood today is a sharp contrast to the sense of gloom and doom a decade ago.  The natural question is whether this optimism is justified.  Will Asia's economies maintain this upward trajectory, or will growth be slowed or derailed?

Asia's Economic Growth

5   I believe Asia's economic growth is anchored by strong and sustainable fundamentals.  The 3 billion plus population in Asia is both a vast pool of labour as well as a rapid expanding market of consumers.  In the past 2 decades, Asian workers, having tasted the first fruits of economic success, have developed an even stronger desire to succeed.  Across Asia, the determination to work hard and to pursue educational upgrading is remarkable.

6   Policymakers are certainly responding not only to this domestic hunger for economic growth, but also to the external competitive dynamics that is being unleashed.  The pursuit of successful growth policies in one country creates a demonstration effect on other countries.  The fear of being left behind has prompted policymakers to continue to liberalise, to attract foreign investments, and to develop their domestic corporates.  In varying degrees, countries are pushing ahead with important structural economic reforms.

7   The liberalization of trade has allowed MNCs to build a highly efficient regional production network, locating different segments of the value chain where they are most competitive.  This has led to a bottom-up integration of Asian economies, and boosted intra-regional trade, which grew by 14% in 2005 as compared to 4% in the EU and 8% in NAFTA.  Importantly, this trade has not come at the expense of Asia's linkages with the world - Asia's trade with the US and the EU has continued to post robust gains in recent years.

8   The Asian economies have also taken advantage of advances in technology, and leapfrogged the usual development stages.  For instance, mobile phones are pervasive in Asia.  China's 460 million mobile users are more than double those in the US.  This development has been achieved swiftly without incurring the prohibitive infrastructure costs of laying telephone cables across her terrain of 9.6 million square kilometers.

Challenges to Growth

9   While policymakers and analysts are confident about Asia's growth prospects, there are challenges to growth, and risks in this optimistic scenario. Internally, rapid growth has put a strain on infrastructure capacity in Asia.  In many regions, there is an urgent need to invest in roads, ports, telecommunications and utilities.   In some areas, there is a danger of excess-capacity, as provinces and states invest heavily in productive capacity, in competition with each other. The pursuit of growth has also led to environmental degradation and inefficient consumption of energy.

10   There is an equally pressing need to improve soft infrastructure especially in education and healthcare. For certain Asian economies, their ability to ride on the productivity dividend of a more youthful population depends critically on whether educational and healthcare facilities can grow fast enough to cope with the rising demands.  For others, there is already a need to address issues relating to ageing populations.  Growth also creates growing income disparity across income groups and regions which can affect stability.  Similarly, improvements in the infrastructure for doing business - investment rules, labour laws, accounting and corporate governance standards - are needed to strengthen the micro-foundations for future growth.

11   External events, such as an avian flu pandemic or geo-conflict instability could also derail growth.   And, if anti-globalisation sentiment in developed economies translates into protectionist policies, or if a sudden turn of investors' sentiment leads to a disorderly unwinding of global imbalances, Asia's economic growth will suffer a major setback.

Asia's Response

12   There has been much debate among analysts on the degree to which Asia's economies have become more diversified or self sufficient, and "decoupled" from and therefore better insulated against a slow-down in the US economy.  Our analysis suggests that while Asia's economies have seen a broadening of the supports of growth, their performance at this point is still closely linked to that of the US.

13   But whatever the situation is today, I believe it is in Asia's and the world's interest to create a stronger growth engine within Asia, and to develop the Asian financial system.  Stimulating domestic consumption in the major emerging economies, as well as fostering greater regional economic integration across Asia can unleash new and sustainable sources of growth.  In the major emerging economies, the potential demand for housing, infrastructure and a whole range of services can provide important stimulus to growth.  Governments in the region will not have all the resources to tackle the variety of bottlenecks in infrastructure and services.  Hence, these problems are also opportunities for the private sector.

14   Across the region, there is scope for promoting cross-border investment and consumption, especially in services such as tourism and education. 
There are many opportunities for enhancing such economic linkages, without causing Asia to become an exclusive economic bloc. 

15   The other major area of change that is needed is in the financial system.  The financial system in Asia is not performing the intermediation function to its full potential.  Despite the growth of Asia's bond markets, Asia's corporates remain dependent on bank loans. This is not ideal from the point of view of financial stability, as well as from the point of view of economic efficiency.  A shift towards a better use of capital markets is necessary.

16   The rising stars among Asian corporates can play a significant role in both these policy areas - in weaving a more intricate network of economic linkages, and in accelerating the development of the capital markets.  Asian corporates have grown in size, complexity and competitiveness.  The presence of so many dynamic companies here today is a testimony to this.   Many are venturing out of their home markets, into the immediate region and beyond.   Singapore has been a beneficiary of this move.  Over 2, 300 Chinese companies and over 2, 500 Indian companies have set up operations in Singapore.  They use Singapore as a base to access a range of financial, business, legal, and info-communications services, and to take advantage of the global connectivity here.  This development is another sign of the growing confidence and ambition of Asian corporates. 

17   On the financial front, Asian corporates have also been more active in tapping the corporate bond market. Domestic corporate issuance has grown substantially. The increasingly sophisticated investor base has also allowed corporates and intermediaries to use more innovative financing structures.  In Singapore, a significant share of private issuance was in the form of structured notes, such as CMBS, ABS and CLN.  An increasing number of Asian corporate heavyweights have made it into top 500 lists, and many have an appetite for overseas acquisitions. Corporate financing and M&A activities will therefore expand.

18   Financial institutions based here are well-positioned to serve the growing needs of corporates in Asia.  Apart from liquidity and talent, a fair and predictable legal system and regulatory responsiveness are important attributes of a financial centre.  As a regulator, we detect the need for more innovative financing instruments among Asian corporates.   Hence, MAS is engaged in constant dialogue with key players to identify these needs so as to facilitate innovation. The introduction in 2002 of Asia's first REIT outside of Japan is an example.  Since then, the REITS market here has grown substantially.  In 2006, the Singapore Stock Exchange listed the world's first Indian ETF as well as the first shipping trust.  This year, Asia's first infrastructure business trust -CitySpring- was listed on the Exchange.

19   I hope Singapore can continue to provide innovative and efficient methods of raising funds for corporates, both in the bonds as well as in the equities markets.  At the same time, we will continue to collaborate with our fellow central banks in Asia to pursue new ways to develop deeper and more efficient capital markets.  As part of the broader ASEAN co-operation, Thailand and Singapore have recently agreed to establish electronic bond-trading linkages.

20   In conclusion, I believe there are strong fundamentals underpinning Asia's growth, even though there are challenges ahead. How well those challenges are tackled in each country will determine its growth path.  Across the region, building stronger economic linkages and deeper financial markets will strengthen the overall foundation for growth.  Asian corporates - especially the rising stars, can play key roles in driving these changes.  Policymakers, corporates and financial institutions can work together to realize the potential of Asia.  On that note, I wish you all a fruitful conference ahead. 

Thank you.