The Central Bank’s effective policy rate has fallen from 18% (the seven-day collateralised lending rate) at the beginning of 2009 to the current 4½% (the average of the current account rate and the maximum CD rate), and is now at an all-time low in the nearly 50-year history of the Central Bank of Iceland. Progress has also been made in improving Iceland’s external liquidity position by expanding the foreign exchange reserves, which reduces concerns about the Treasury’s ability to service its foreign debt in coming years. Repurchases of the Treasury’s foreign debt have also helped. The foreign exchange reserves exclusive of short-term obligations could quickly grow to over 3 billion euros, if Iceland draws in full on the loans contingent upon the third IMF review and when payments on the Avens agreement and the sale of Danish bank FIH are remitted. In comparison, the Icelandic Treasury’s payments of instalments and interest on two bond series maturing in 2011 and 2012, less repurchases, amount to 1.1 billion euros. This positive development explains the relatively upbeat outlook of foreign bankers and analysts towards Iceland, as could be discerned at the annual meetings of the IMF. It also explains why the CDS spread on sovereign debt has fallen in recent months and now lies below that of the European countries whose public debt problems have dominated business media recently. But we have to do better if Icelandic companies are to gain access to foreign credit markets on acceptable terms.
Nevertheless, there is much that the government can do to facilitate financial-market development by clearing the way, particularly where this involves markets of a regional nature. Three areas of work in which the HKMA – with various partners – is taking an active role are worth citing here. The first involves the gradual introduction and expansion of renminbi business within Hong Kong, which requires primarily co-operation between the Mainland and Hong Kong authorities at various levels, including both political and technical. The second example is our collaboration with other central banks in the region, under the auspices of EMEAP, on the Asian Bond Fund, which is intended not just to encourage business in the debt market, but also to stimulate regulatory reforms in economies in the region. The third example is our work in encouraging the development of Islamic finance in Hong Kong, through ensuring a level playing field, stimulating interest in Hong Kong among Islamic countries, encouraging product development, and raising market awareness within Hong Kong, particularly through the educational work of the Treasury Markets Association. All of this work looks both to the past and to the future for inspiration. Looking to the past, we have the still-recent experience of the Asian financial crisis, one element of which was the undeveloped state of some of our financial markets, in particular the debt market. Many of the market-development initiatives on which we have been working have been intended to address these deficiencies.