1   Good morning, distinguished guests, ladies and gentlemen. It is a great pleasure to be here this morning, and to join so many prominent speakers at the 3rd Annual Asian Bond Markets Summit in Singapore.

2   The financial turmoil that stemmed from the US subprime mortgages last year had reverberated through the securitization markets, the wider debt capital markets, the equities markets and the banking sector – leading to a turbulent phase for financial markets that is unprecedented in magnitude. Major US and European financial institutions come under heavy pressure over solvency concerns, triggering the loss of confidence in counterparties.

3   Financial deleveraging continues as banks unwind positions, recapitalize and repair their balance-sheets. Reduced credit availability and tightening of credit standards led to higher cost of capital and reduced access to wholesale funding. As the financial community becomes more risk averse and seeks quality and safety, fund raising is expected to be more restrictive for borrowers with high-risk profile. The re-pricing of risk, evaporation of liquidity and widening of credit spreads have also added to the turbulence of the market. 

4   It is clear that this financial meltdown has added stress to the economic environment. The concoction of bubble bursts, corporate financial distress, and significant decline in the global equity markets have clouded the economic outlook and market sentiments. Global growth rate is expected to moderate from 5% in 2007 to 3.9% this year and to 3.0% in 2009, the slowest pace since 2002.

5   Containing systemic risks and restoring financial and economic stability have become global issues that are now faced by Asian financial markets and not just the developed markets. In my view, there are two important lessons from this crisis. Allow me to elaborate.

6   The first has to do with risk management. This crisis has made apparent the importance of effective and resilient risk management capabilities and the need to strengthen stress testing in financial institutions. The growing complexities of products in financial markets have inevitably given rise to the mispricing of risk as it becomes more difficult to fully comprehend and manage the underlying risks. Furthermore, credit risk measurement models may have amplified the risk of pro-cyclicality. Having said that, I firmly believe that financial innovation is an important aspect in the development and maturity of the bond markets. But product sophistication should be accompanied by comprehensive risk management.

7   The over-reliance on short-term financing and excessive use of leverage mean that banks’ funding liquidity can be very vulnerable to market liquidity risks, especially with the proliferation of risk transfer technologies. In such times of market stress and illiquidity, banks are reducing their lending activities due to heightened concerns about counterparty risk. This leads to the evaporation of liquidity and, hence adversely affects the cost and availability of credit. Thus, greater emphasis should also be placed on stronger liquidity management practices. Should deleveraging be protracted in the current crisis and banks be forced to sell their assets to meet liquidity needs, this will exacerbate the decline in valuation and set off another round of marking down of asset value. This can be a source of systemic risks and we have to continue to be vigilant.

8   This brings me to my second point on transparency. It is clear that improved disclosure and better oversight of a financial institution’s on- and off-balance sheet exposures now play a greater role in today’s financial markets. The lack of transparency in both the valuation and the inherent risks, together with the resulting losses associated with these complex structures, has considerably added on to the complications of the lending process. With the deterioration of market confidence and lower tolerance for risk, investors will demand greater transparency. Indeed, there is still room for improvements in accounting standards, corporate governance and disclosure.

9   As a result of the present turbulence, some people now view derivatives as toxic. But I think it is important for us to be able to differentiate between the uses of the instrument versus how it can be misused. Derivatives have been around for many years to help transfer risks from those who do not want it to those who do and are better able to manage it.  The tool is meant to enhance market efficiency by allocating capital to its most effective use. This financial crisis should not discourage financial innovation but rather, remind us the importance for financial intermediaries to maintain the highest standards of professional integrity. Financial institutions have the responsibilities to increase its transparency in dealings with the consumers and intermediaries alike, to provide proper advice that is in the best interest of the client and to educate the client on the product features and its corresponding risks, based on the client’s risk profile and appetite.

10   The current turbulence in the market presents a timely opportunity for the industry to invest in risk management, strengthen the fundamentals for sound capital management, and build up competency standards. There is still much work to be done.

11   Let me now turn to the developments in Asia. Despite the doom and gloom, the outlook for Asia is not as bleak. Asia has grown to become more resilient and is in a better position to brave the present turmoil than in the Asian financial crisis a decade ago. With the growth engine of China propelling the region ahead, GDP growth in Asia, though projected to moderate from 9.3% in 2007 to 7.7% in 2008 and 7.1% in the year after, is expected to exceed the global growth rate.

12   Asia is holding up relatively well despite market conditions. Asia (ex-Japan) domestic bond market size is now standing at US$4.3 trillion, more than five times in size from the last decade. As global debt capital markets took a blow with issuance volume declining, more deals are being done in Asian local currencies as evident in the first three quarters’ issuances of this year. This indicates the draw of the local currency as a financing option for borrowers as they diversify out of G3 markets in the current turmoil.

13   In addition, infrastructure financing needs in Asia will continue to gain significance. It is estimated that, collectively, the region will need about $250 billion to $300 billion every year on investments in infrastructure. There is scope for Asia’s massive savings pool to be more effectively mobilized and channeled via the capital markets to meet these growing needs within the region. This presents significant opportunities for financial intermediaries in the region.

14   The prospects for Asia bond markets in the medium term are still very promising. Ultimately, the key issue is to restore market confidence. I believe that Asian local currency bonds will gradually gain favour as an increasingly attractive asset class when the dust of this financial storm settles.

15   Let me conclude. As you have heard before, every crisis presents both danger and opportunity and the Chinese characters “危机”, for crisis, sums this up. The environment that Asia faces today is uncertain. It is crucial for us to remain very alert and vigilant. But in every crisis, both challenges and opportunities will be created. Despite the current difficulties in the capital markets, we will continue to press ahead to further develop deep and liquid bond markets. Asia is well-placed to weather the storm of the financial turmoil and emerge stronger and more dynamic.

16   On this note, I wish you a very successful and fruitful conference. Thank you.