How the international downturn has influenced the Norwegian economy Turning to the Norwegian economy, our export industry is being severely affected by the sharp global downturn, and this is having repercussions on other Norwegian business sectors. Mainland GDP is expected to fall by 1 per cent this year. BIS Review 42/2009  1  As in other countries, a wide range of instruments is being used to counteract the effects of the financial crisis. In order to curb the fall in activity, government expenditure will be increased by over 10 per cent this year. Norges Bank’s bank lending survey shows that banks have been tightening credit standards substantially, particularly for corporate loans. To boost the credit market, a separate government fund 1 will buy private bonds. The government has also provided loans and guarantees for exports and expanded lending limits for the Norwegian State Housing Bank and other special vehicles for government financing. 2 At present, our banks are financially sound, but they need to strengthen their core capital in order to be able to supply credit as normal. The authorities are offering risk capital to banks, including core Tier 1 capital without voting rights, through a newly established State Finance Fund. To facilitate the funding of banks operating in Norway, a swap arrangement was established allowing banks to exchange covered bonds for up to NOK 350 billion in government securities. A number of banks have made use of this facility, so far in an amount totalling NOK 90 billion.
It therefore seems that the Asian banking and financial markets are moving along the right track and we should congratulate each other for this accomplishment. However, I am not entirely sure if Asia can afford to feel complacent because I believe Asia’s finance is still facing many short-run and longer term challenges. In the interest of time, I would just highlight two key challenges. a.  Short-run challenge: clearly this has to do with the Fed tapering and the normalisation of the US interest rates. The key question is to what extent the unwinding of the dollar carry trade, which prevailed for over 5 years since the collapse of Lehman, would lead to significant outflow of funds and tightening of market liquidity across Asia. The risk of a “new normal” causing a rise in interest rates, re-pricing of assets and a slow down of economic growth would be a big challenge for Asia in the next year or two. BIS central bankers’ speeches  1  b. Longer term challenge: there are many structural reform challenges for Asia’s capital markets, but today I would just focus on infrastructure financing. It is beyond doubt that Asia needs heavy investments in infrastructure in the next decade or two. Some have estimated the amounts of funding needed for infrastructure financing to be in the order of $ bn a year. At the same time, Asia has accumulated a huge amount of savings, which are more than adequate to finance the infrastructural investments in the region.