Bandid Nijathaworn: Regional financial integration and development of local markets Speech by Mr Bandid Nijathaworn, Deputy Governor of the Bank of Thailand, at the JP Morgan Investor Seminar during the IMF/WB Annual Meetings, Singapore, 17 September 2006. *  *  *  First, let me start by thanking JP Morgan for inviting me to speak this morning. The topic today is “Regional Financial Integration and Development of Local Markets”. Given the limitations of time, I want to focus my talk this morning on just two issues. The first is on what has been achieved so far in East Asia in regional financial integration. And the second is the prospect for regional financial integration as we move forward, and what role should policy play. To begin, I think one important defining phenomenon that has been a key driver of East Asia’s recent rapid growth is the increased interdependency amongst economies in the region, especially in trade, and especially in the trade between China and the rest of the region. Intra-regional trade is now the largest component of total trade in most East Asian economies. For example, total trade share of Asia10 with Asia-10 has risen to 41 percent this year, compared to a share of about 21 percent fifteen years ago. And Asia-10 now trade among themselves more than with the G3 economies.
However, there are risk scenarios which, if materialized, may alter the macroeconomic outlook, with implications on monetary policy. On this occasion, after assessing the alternative scenarios, the Board estimates that the risk balance for both output and inflation is unbiased. Although the risks in the international scenario are similar to those in previous Reports, their possibility of occurrence is smaller. Still, structural issues persist in the Eurozone, so the regained confidence in financial markets is yet to be consolidated. Repeated or intensified financial stress episodes, in a context where banks are more cautious in their lending decisions and capital requirements have increased, could deepen credit constraints, complicating the growth outlook for the region and the world at large. There are also persistent doubts about how China’s slowdown will be. If more intense, its effects will not only hinder world growth, but also pull down commodity prices, especially for copper. Conversely, other economies could well perform better than expected, and offset part of these effects. The calmer external financial markets and the renewed appetite for risk have revived concerns about how to accommodate the new capital flows into emerging economies. Prolonging the strong monetary stimuli in the developed world, particularly in the U.S., may foster an extension of global imbalances. Public indebtedness is elevated in the U.S. and the high oil price hinders the resolution of its external deficit.