The growing complexity and interconnectedness in financial and economic systems, the increasing speed of change, as well as the ongoing structural changes in emerging markets will have profound impacts on all sectors of the global financial industry. These driving forces will shape the evolution of the financial system and the economy, as well as the risk-return profiles of a range of financial products. Financial institutions, investors, regulators, policymakers and researchers will have to make significant changes to their mental models, policies and practices. Let me touch briefly on some of these implications. Implementing policy reforms 9. Given Asia’s changing dynamics, Asian policymakers face some difficult balancing acts in navigating the challenges. They need to grow the financial system to support economic growth and promote the efficient intermediation of savings, but in ways which are safe and stable. They need to deepen capital markets, and permit the growth of hedging instruments and derivatives while keeping out instruments that are complex or opaque. They need to reduce the opportunity for regulatory arbitrage across different sectors, and treat similar risks in similar ways, without adopting a one-size-fits-all approach that reduces the diversity of players in the industry which might in turn reduce the overall resilience of the financial system. There is merit, for instance, in having diverse players such as pension funds and insurance companies that have different investment horizons and requirements in their asset-liability matching.
The intensification of the process of financial integration and liberalization of the capital transactions as global processes, have set new challenges for the countries in transition, which reflected not only in the balance of payments capital account, but in return in the balance of payments current account, as well as the exchange rate regime. Positive macroeconomic performances of the countries, as well as the fast global growth, low rate of inflation and historically low level of the interest rates in the developed countries are factors that caused high capital inflow in the transition countries and produced significant implications for the conduct of monetary policy in the transition countries. Having in mind that the majority of them are characterized by fixed exchange rate regimes, high capital inflows resulted in appreciation of the real exchange rate and further deepening of the trade deficit, and consequently of the deficit in the balance of payments current account. The process was intensified additionally by the higher productivity growth in the tradable goods through the so-called Balassa Samuelson effect, which according to certain estimates increased the appreciation of the currency on 4 average by 1.5 to 2.5 percentage points . Experiences of more developed transition countries are of special importance for the future challenges of the Republic of Macedonia, as a part of the increasingly intensifying process of EU integration.