While the adjustments in housing market are also ongoing in Europe, and some European Banks have reported losses in CDOs, the impact on economic activities is expected to be more limited. For example, Consensus Forecasts in February, revised downward the Euro Zone’s GDP growth for 2008 by only 0.3 percentage points from December compared with a 0.5 percentage point downward revision for the US. For Southeast Asia, the impact is also forecasted to be limited. Latest consensus forecasts for Southeast Asia’s GDP growth is 5.7 percent for 2008, declining slightly from the forecast of 5.9 percent in December last year. These forecasts, together with the latest data, suggest that, in the short-term, things will likely get worse before they get better, and the slowing of growth in the US will impact growth globally. The key question, at this time, is how deep can things get before we see a turnaround. This is definitely an important, but a difficult question to answer. Market  BIS Review 29/2008  1  participants as usual will have a range of views, and I personally do not intend to offer another prediction. Instead, I want to share with you my thoughts on the current developments and on what this will mean for Thailand. To begin, one context that I think is useful in understanding the current turmoil is the unwinding of the global imbalance, triggered by corrections in the US housing market that began in 2006, and is now ongoing.
Since speculative activities naturally fit into this risk-return temporal pattern, given that they usually yield substantial immediate profits at the outset at the expense of a possible once-for-all large loss at an uncertain future date, a more cautious credit strategy will tend to penalise the funding of self-fulfilling asset-revaluation processes. Forward-looking risk management that is aware of how risk-drivers change through the cycle and in stress conditions will tend to build shock absorbers to be used when difficult times arrive. I will return later to this idea and how Basel II encourages the appropriate use of capital buffers. Let me add now that the idea of building robustness in good times is not only a prudent policy, it is also theoretically consistent because we all have a tendency to think that risks increase in bad times. From my perspective, this is only true in part. A better description is to say that exposures and therefore risks increase in good times and that in bad times these risks materialise. On top of that, to the extent that risk assessment and control methods become more formalised and rigorous, this will lessen the likelihood of making bad decisions and will improve risk-adjusted pricing policies. It will also contribute to the prompt detection of errors and deviations from targets, allowing banks to implement corrective measures at an early stage.