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Challenges and Opportunities from Challenges and Opportunities from Financial Globalization for Fund Financial Globalization for Fund

Managers and Policy Makers in the Managers and Policy Makers in the Asia-Pacific RegionAsia-Pacific Region

Presentation by Mr. Takatoshi KatoPresentation by Mr. Takatoshi KatoDeputy Managing DirectorDeputy Managing Director

International Monetary FundInternational Monetary FundDecember 12, 2007December 12, 2007

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Challenges and Opportunities from Financial Challenges and Opportunities from Financial GlobalizationGlobalization

Today, I will cover two main sets of issues that are Today, I will cover two main sets of issues that are relevant for the Asia-Pacific region:relevant for the Asia-Pacific region:

• The factors that will spur continued and The factors that will spur continued and successful growth of the asset management successful growth of the asset management industry, and industry, and

• Lessons and challenges from recent market Lessons and challenges from recent market turmoilturmoil

33

Pension funds assets have grown rapidlyPension funds assets have grown rapidlyGrowth in Pension Funds Assets, 2005-06 (percent per annum)Growth in Pension Funds Assets, 2005-06 (percent per annum)

-10

0

10

20

30

40

50

60

Korea China Australia HongKongSAR

Thailand Indonesia India J apan Singapore

Source: OECD's Pension Markets in Focus, November 2007.

44

The Asia Pacific Region exhibits wide The Asia Pacific Region exhibits wide variety in terms of the size of capital marketsvariety in terms of the size of capital markets

Capitalization in Selected CountriesCapitalization in Selected Countries(In percent of GDP)(In percent of GDP)

0

100

200

300

400

500

600

700

800

900

1000

HK SAR Singapore Japan Malaysia Australia Korea India Philippines Thailand China Indonesia

Stock market capitalization

Total debt securities

Sources: Bank for International Settlements (BIS); Bloomberg; and IMF, World Economic Outlook database.

55

Better infrastructure reduces volatility of Better infrastructure reduces volatility of capital flowscapital flows

Regulatory Quality (2 is highest)

Note: Inflow volatility measure in absolute values.

0

1

2

3

4

5

6

-1.5 -1 -0.5 0 0.5 1 1.5 2

Inflow

vola

tility

/in

flow

level

Indonesia

Vietnam

Sri Lanka

Hong Kong SAR

China

India

Philippines Malaysia

Korea Singapore

66

Australia’s capital markets have shown Australia’s capital markets have shown robust growth robust growth

Capitalization in billions of U.S. dollarsCapitalization in billions of U.S. dollars

0

500

1000

1500

2000

2500

Sep.2003

Dec.2003

Mar.2004

Jun.2004

Sep.2004

Dec.2004

Mar.2005

Jun.2005

Sep.2005

Dec.2005

Mar.2006

Jun.2006

Sep.2006

Dec.2006

Mar.2007

Stock market capitalization

Total debt securities

Sources: Bank for International Settlement (BIS); and Bloomberg.

77

Gross capital flows have surged recentlyGross capital flows have surged recently(In percent of GDP)(In percent of GDP)

-6

-4

-2

0

2

4

6

8

10

1998 1999 2000 2001 2002 2003 2004 2005 2006Sources: Staff estimates based on IFS, CEIC, and WEO database.

Emerging Asia

Emerging Asia (exc HKSAR and Singapore)

88

Exchange rates have appreciated for many Exchange rates have appreciated for many countriescountries

Real Effective Exchange Rates for Selected Asian CountriesReal Effective Exchange Rates for Selected Asian Countries(January 2005=100)(January 2005=100)

70

80

90

100

110

120

130

Jan-05

Mar-05

May-05

Jul-05

Sep-05

Nov-05

Jan-06

Mar-06

May-06

Jul-06

Sep-06

Nov-06

Jan-07

Mar-07

May-07

Jul-07

Sep-07

Nov-07

Japan Korea

Singapore Indonesia

Malaysia Philippines

China India

Source: IMF, Information Notice System.

99

Asset-backed securities’ spreads have Asset-backed securities’ spreads have widenedwidened

Asset–backed Securities Spreads, 2007 (in basis points)Asset–backed Securities Spreads, 2007 (in basis points)

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

J an-07 Feb-07Mar-07 Apr-07 May-07 J un-07 J ul-07 Aug-07 Sep-07 Oct-07 Nov-07Dec-07

AAA

AA

A

BBB-

1010

Liquidity has declined substantially, Liquidity has declined substantially, reflecting global funding pressuresreflecting global funding pressures

Global Funding Pressure (In percent, average of Euro area, U.K., and U.S. rates)

4.50

4.75

5.00

5.25

5.50

5.75

6.00

Jan

-07

Feb

-07

Mar-

07

Ap

r-07

May-0

7

Ju

n-0

7

Ju

l-07

Au

g-0

7

Sep

-07

Oct-

07

No

v-0

7

Dec-0

7

Average 3-month LIBOR rates

Average policy rate

ECB €95 bnliquidity injection

50 bp Fed cut

1111

Demand for structured products in Asia has Demand for structured products in Asia has been relatively lowbeen relatively low

Buyers of Asset-Backed Securities Collateralized Debt ObligationsBuyers of Asset-Backed Securities Collateralized Debt Obligations(In billions of U.S. dollars)(In billions of U.S. dollars)

By Region and Rating

0

10

20

30

40

50

60

70

80

Asia/Australia Europe United States

Senior (A to AAA)

Mezzanine (BB to BBB)

Equity

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Macroeconomic risks remainMacroeconomic risks remain Sharper-than-expected U.S. slowdownSharper-than-expected U.S. slowdown

• Trade and financial linkages with Asia-Pacific Trade and financial linkages with Asia-Pacific region remain significant.region remain significant.

Lower capital inflows to the regionLower capital inflows to the region• The cost of capital may rise, and access to The cost of capital may rise, and access to

capital may be more difficult where macro and capital may be more difficult where macro and other fundamentals are weak.other fundamentals are weak.

Further pressure on oil pricesFurther pressure on oil prices• Supply capacity remains tight and demand is Supply capacity remains tight and demand is

growing rapidly.growing rapidly.• And higher energy and other commodity prices And higher energy and other commodity prices

could add to inflationary pressures.could add to inflationary pressures.

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The recent turmoil suggests a number of The recent turmoil suggests a number of priorities for national authorities and priorities for national authorities and

standard setters…standard setters… Ensure investors and supervisors have accurate Ensure investors and supervisors have accurate

and timely information on risks. and timely information on risks.

Consider the need to widen the perimeter used Consider the need to widen the perimeter used by supervisors and financial institutions to assess by supervisors and financial institutions to assess risks. risks.

Assess whether “originate and distribute” model Assess whether “originate and distribute” model dilutes credit discipline.dilutes credit discipline.

Examine role and effectiveness of ratings for Examine role and effectiveness of ratings for credit derivatives and structured products. credit derivatives and structured products.

But investors and financial institutions also need But investors and financial institutions also need to scrutinize credit and liquidity risks of to scrutinize credit and liquidity risks of investments and collateral more carefully.investments and collateral more carefully.

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Thank youThank you