The mechanisms for mopping up the excess liquidity need to be put in place early. Meanwhile, the scale of fiscal stimulus, and funding needed to support this, has raised the spectre of destabilised sovereign bond markets and the crowding out of private borrowings. This does not bode well for private capital formation, and could create stresses downstream for corporations which do not have the advantage of sovereign backing. Further, if deficits are seen to be structural, market reaction could negate much of the effect of fiscal stimulus. There is also the issue of how to  BIS Review 30/2009  3  restore private-sector driven intermediation of credit in due course. While government support for businesses’ access to credit is necessary now, it cannot continue indefinitely. In other words, even as we take unconventional measures, we need to have an eye on medium-term sustainability, and make clear our "exit" strategy and timing. Just as we must not be behind the curve in taking action to stabilise markets, we need to anticipate what lies ahead and plan accordingly. This is crucial because that later-stage "exit" action represents not just the end of this phase but a crucial transition into another set of conditions with totally different policy demands. Third, we need to consider the global dimension of our responses, and the impact on other economies. For instance, the bank deposit guarantee scheme that first started in Ireland triggered a domino effect and made its way to this region.
Credit flows to corporations have been affected by the heightened risk aversion of domestic banks as well as by some pull-back by global banks. A few economies have experienced considerable capital outflows. The economic contraction will certainly affect the loan books of banks. Should the downturn be deep and prolonged, the resilience of banks with weaker risk management systems will be severely tested. It is necessary to remain vigilant. However, Asia’s economic performance and policy responses so far provide assurance that the medium-term growth story remains compelling. FDI and domestic investments have increased over the years, and intra-region production networks have deepened. Both the hard and soft infrastructures have improved significantly in the last decade. Domestic consumption’s contribution to growth has grown steadily, and will play a bigger role in future. The drive towards deeper regional integration remains unabated. Just days ago, ASEAN signed the Agreement Establishing the ASEAN-Australia-New Zealand Free Trade Area, and re-affirmed its commitment to implement the ASEAN Economic Community. One important question for many participants here today is the policy direction of Asian governments towards the financial sector. I believe that authorities in the region will continue with the twin track of developing the banking system and capital markets. The importance of a well-functioning financial system in supporting economic growth and wealth creation is well recognised in this region. The need for funding to promote investment, develop infrastructure  4  BIS Review 30/2009  and facilitate urbanisation will return.