Strengthening the financial system and mobilizing savings to support more balanced growth in ASEAN+3

As witnessed during the 1997/98 Asian financial crisis, the dependency on short-term foreign capital for long-term investment made the region vulnerable to the sudden reversal of capital inflows. Rapid capital outflows not only caused the collapse of the financial system but also a sharp economic contraction that caused millions of citizens to fall below the poverty line and reversed overnight the gains in poverty alleviation that had taken decades for governments in the region to achieve. To mitigate against risks associated with the sudden stop of capital inflows, the Association of Southeast Asian Nations (ASEAN) and the People's Republic of China, Japan, and the Republic of Korea - collectively known as ASEAN+3 - have been working together to develop local currency bond markets in order to mobilize domestic savings to finance long-term investment and strengthen the resilience of the financial system in the region. The first regional initiative designed to achieve this endeavor was the Asian Bond Market Initiative (ABMI), launched by ASEAN+3 in 2002. The second was Asian Bond Fund 1 and 2, launched in 2003 and 2005, respectively by EMEAP economies.* The Asian Development Bank has provided support to ASEAN+3, as the secretariat, to facilitate the implementation of the policy actions promoted under ABMI. <p> This paper reviews the progress made under ABMI over the past 10 years, particularly the progress made in mobilizing domestic savings for investment. The paper then proposes measures for ASEAN+3 economies to more effectively channel domestic savings for investment and stimulate domestic demand to help modify growth patterns and improve savings -investment imbalances.