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|Minister Bahk gives a keynote speech at the Asian Financial Forum|
Asian Financial Forum
Ministry of Strategy and Finance
Keynote Speech, Policy Dialogue Session
Thank you Mr. Chan for your kind introduction. It is my great pleasure to join distinguished speakers and have the chance to discuss “The Voice in Global Finance” Ladies and gentlemen, many worry that we are facing another tough and thin year ahead of us. I would like to share my view on how to facilitate the recovery process and improve the resilience of global economy.
2. Diagnoses on Global Financial Crisis and Fiscal Crises
There could be various theories regarding the causes of the prolonged crisis started in 2008. I believe excessive leverage is the main culprit. In 2008, it was debt of financial sector that was problematic and now the issue seems to be the public sector's solvency ability. No matter who borrows, whether it be a household, firm, or government, every entity must repay its debt in the end. But, if you have to pick one, government's debt should be the last resort since the public sector is the least efficient. The research of Reinhart and Rogoff shows that booms fueled by excessive debt have always led to economic crises. And it cites unwarranted confidence that "this time is different" as the cause of the bubble. Once solvency is questioned, there is no 'panacea' to overcome the crisis at once. However, we must endure necessary reforms to improve economic fundamentals, though it might be painful. The recent quantitative easing policies may contribute to swift global economic recovery. However, some doubt whether the measures will actually lead to improve economic fundamentals. We need to bear in mind that supplying liquidity may buy some time, but it can also inflate the bubble.
3. Lessons from Korea's Experience in Overcoming the Crisis
During the 2008 global financial crisis, Korea faced difficulty because of the large foreign portfolio outflows. However, in the end, Korea was praised as having made a so-called "textbook recovery." And despite the Eurozone crisis, Korea's sovereign credit ratings have been upgraded by three major global ratings agencies. That can be attributable to several reasons but I will elaborate on two main factors; External and fiscal soundness. Compared to 1997, the ratio of short-term foreign debt to foreign reserves fell by more than one fourth. And Korea's sound fiscal status enabled the country to pursue aggressive fiscal stimulation. Just having turned the corner, Korea keeps working to restore the fiscal soundness to cope with the prolonged Eurozone crisis. Especially, despite political pressure for more expansionary fiscal measures during the campaigns for the general election and the presidential election, we managed to save the fiscal ammunition. And in order to effectively respond to economic downturn, while securing fiscal prudence, we turned to some creative measures. For instance, we have shifted to the interest rate gap subsidization program to support loans, which used to be financed wholly by the government. The shift could increase fiscal expenditures without any burden on the government debts. Also, we have put a cap on the amount of income tax exemption. The cap could help circumvent any political resistance against the reduction in tax incentives targeted for specific sections, classes or industries.
4. Improving Financial Soundness at the Global Level: Global Financial Regulatory Reform
Distinguished guests, the lack of appropriate financial surveillance and infrastructure can aggravate the negative impacts from excessive leverage. As such, it is most essential each country make multi-faceted efforts to ensure stable financial system. International community is also making concerted efforts to lower the risk of financial institutions and improve the macroeconomic stability. Korea will do its part and continue to implement the new financial reform measures such as introduction of central counter parties, information sharing on tax havens, and the regulation on SIFIs (systemically important financial institutions).
Although it is difficult to assess the impact of the financial regulatory reform, there are three points to keep in mind. First, regulatory arbitrage can cause disorder in the market. Harmonized regulations and their consistent implementation are very important. Second, as there may be unintended consequences of financial reform, we should be on the watch through continual assessment on the effects. In particular, we must take emerging markets into account, whose financial markets are not liquid enough. Third, too much regulation, coupled with low-growth and low-interest trend, can hurt the soundness of financial institutions. Stress test should be conducted to devise appropriate countermeasures. We also need to coordinate timing and sequence in a seamless manner.
5. Improving Fiscal Soundness at the Regional Level: Bolstering Financial Cooperation in East Asia
I would also like to talk about ways to strengthen financial system from Asian perspective, especially from a highly open economy. Since most Asian countries do not have a reserve currency, they are vulnerable to external shocks. This is widely known as "original sin." In response, Korea has introduced macro-prudential policies such as bank levy and ceiling on banks' FX (foreign exchange) forward position. It is welcome that international communities including the IMF recently changed their institutional view on capital flow management. On a regional perspective, it is important that Asia equips itself with abilities to head off crisis on its own. Many efforts have been made, mainly through ASEAN+3 process such as the launch of CMIM and AMRO.
However, we still have a long way to go. First, we need to further develop the Asian capital market. So far integration of the financial sector lags far behind that of the real sector in Asia. The intra-regional trade accounted for more than 50% of the region's total trade. In contrast, bond investment within the region was less than 10%. Advanced financial market in Asia will help create virtuous circle of capital flow. For instance, the recent steady increase in Japanese bank loans to Asia is buffering the impact of deleveraging by European banks. It is our important task to expand core financial infrastructure such as the regional settlement intermediary (RSI) and speed up our discussion on the harmonization of regional bond market regulations. Second, we need to increase the use of local currency in trade. Recently, Korea and China have made important progress by announcing a pilot program utilizing the existing bilateral currency swap for trade settlement. In the long-term, voluntary use of local currency in regional trade should take place without government support.
Ladies and gentlemen.
I have suggested two policy areas for financial system stability; effectively managing the excessive leverage and increasing Asian regional financial cooperation. It may be difficult to apply a "one-size-fits-all" policy. Nevertheless, we should find common solutions as we remember that "history repeats itself." As deleveraging is a slow process, uncertainty in the global financial markets may continue for the time being. To prepare for a monsoon, we should never stop checking for leaks and damages and fixing them in a timely manner.
Please refer to the attached PDF file