1. 1 Challenges and Opportunities from Financial Globalization for Fund Managers and Policy Makers in the Asia-Pacific Region Presentation by Mr. Takatoshi Kato Deputy Managing Director International Monetary Fund December 12, 2007

2. 2 Challenges and Opportunities from Financial Globalization Today, I will cover two main sets of issues that are relevant for the Asia-Pacific region: The factors that will spur continued and successful growth of the asset management industry, andThe factors that will spur continued and successful growth of the asset management industry, and Lessons and challenges from recent market turmoilLessons and challenges from recent market turmoil

3. 3 Pension funds assets have grown rapidly Growth in Pension Funds Assets, 2005-06 (percent per annum)

4. 4 The Asia Pacific Region exhibits wide variety in terms of the size of capital markets Capitalization in Selected Countries (In percent of GDP)

5. 5 Better infrastructure reduces volatility of capital flows Regulatory Quality (2 is highest) Note: Inflow volatility measure in absolute values.

6. 6 Australia’s capital markets have shown robust growth Capitalization in billions of U.S. dollars

7. 7 Gross capital flows have surged recently (In percent of GDP)

8. 8 Exchange rates have appreciated for many countries Real Effective Exchange Rates for Selected Asian Countries (January 2005=100)

9. 9 Asset-backed securities’ spreads have widened Asset–backed Securities Spreads, 2007 (in basis points)

10. 10 Liquidity has declined substantially, reflecting global funding pressures

11. 11 Demand for structured products in Asia has been relatively low Buyers of Asset-Backed Securities Collateralized Debt Obligations (In billions of U.S. dollars)

12. 12 Macroeconomic risks remain Sharper-than-expected U.S. slowdown Sharper-than-expected U.S. slowdown Trade and financial linkages with Asia-Pacific region remain significant.Trade and financial linkages with Asia-Pacific region remain significant. Lower capital inflows to the region Lower capital inflows to the region The cost of capital may rise, and access to capital may be more difficult where macro and other fundamentals are weak.The cost of capital may rise, and access to capital may be more difficult where macro and other fundamentals are weak. Further pressure on oil prices Further pressure on oil prices Supply capacity remains tight and demand is growing rapidly.Supply capacity remains tight and demand is growing rapidly. And higher energy and other commodity prices could add to inflationary pressures.And higher energy and other commodity prices could add to inflationary pressures.

13. 13 The recent turmoil suggests a number of priorities for national authorities and standard setters… Ensure investors and supervisors have accurate and timely information on risks. Ensure investors and supervisors have accurate and timely information on risks. Consider the need to widen the perimeter used by supervisors and financial institutions to assess risks. Consider the need to widen the perimeter used by supervisors and financial institutions to assess risks. Assess whether “originate and distribute” model dilutes credit discipline. Assess whether “originate and distribute” model dilutes credit discipline. Examine role and effectiveness of ratings for credit derivatives and structured products. Examine role and effectiveness of ratings for credit derivatives and structured products. But investors and financial institutions also need to scrutinize credit and liquidity risks of investments and collateral more carefully. But investors and financial institutions also need to scrutinize credit and liquidity risks of investments and collateral more carefully.

14. 14 Thank you