Asia's Resilience

• Author: Zeti Akhtar Aziz
• Position: Governor of Bank Negara Malaysia, the national central bank.

ASIA weathered the global financial crisis and its aftermath with a resilience it built steadily over the past decade. Today, that resilience is again being tested as a significant transition takes place in the global economic and financial landscape.

As the recovery in the major advanced economies strengthens, the end of unconventional monetary easing in these economies is an inevitability. While the prospect of a return to more conventional monetary policy reflects improved economic conditions, it has been accompanied by heightened volatility, with spillovers to the emerging market economies. Asia, with highly open economies and increasingly globally connected financial systems, is not insulated from these external developments. The region will benefit from the global recovery, and its strength and resilience will help it navigate this more volatile international financial environment.

Managing the transition

Almost six years of exceptional monetary accommodation in advanced economies—mainly through large-scale central bank purchases of assets to drive down long-term interest rates—has left the world in uncharted territory. Monetary policy normalization will present a challenging transition. Following the indications of a potential U.S. Federal Reserve scale-back in quantitative easing (its term for unconventional monetary policy) in May 2013, emerging market economies experienced large reversals of capital flows. Within eight months, approximately a quarter of the capital that had flowed into those economies during the preceding four years had reversed. Several economies—in particular those with deficits in both their fiscal and current account positions and high rates of inflation—experienced significant exchange rate depreciation and a decline in equity and bond prices.

Nonetheless, despite increased volatility in capital flows and financial markets, macroeconomic and financial stability in Asia was preserved. Financial intermediation—the linking of savers and borrowers—was not interrupted, and creditworthy households and businesses had continuous access to financing. Economic activity in the region remained broadly unaffected by these volatile financial conditions.

Asia’s ability to intermediate large and volatile capital flows is the result of its strong economic fundamentals and sound banking systems, which have been reinforced by improved governance and risk-management practices and enhanced regulatory and supervisory oversight...