The Future of Financial Markets – A Changing View of Asia

A vendor handles cash at a market in Indonesia.
A vendor handles cash at a market in Indonesia.

By Christopher Thieme

Discussions this week in Frankfurt won’t solve the problems of Asia’s financing gaps, but they can go a long way toward making sure that available funds are used more productively, inclusively, and sustainably.

Asia's investment needs are enormous and growing. At the same time, investors with large pools of savings—both within and outside Asia—are looking for quality investments that can provide stable, predictable returns. Financial markets play a critical role in matching the sources of finance with their productive uses and with infrastructure needs alone topping $800 billion a year, Asia and Pacific have some of the greatest potential for productive investments to increase growth and create good quality jobs.

Reaching this potential ‘win-win’ scenario will be the subject of discussion of an eminent panel seminar today on the changing role of Asia in the financial markets at ADB’s Annual Meeting this week in Frankfurt. The panel will bring together thought leaders drawn from the public and private sector to look at where the opportunities and challenges for Asia lie today, where it is heading, and what are the key variables that may play out over the coming year. A key component will be to explore answers on what can be done to encourage international, and particularly European, funds flowing into Asia, including into private infrastructure.  

Finding sources of long-term financing will be essential for the development of quality infrastructure in the region. Financial assets in the global economy exceed $30 trillion, but markets continue to struggle to de-bottleneck the connection between capital and investment projects. Moreover, the changing nature of capital flows in Asia has created new challenges to sourcing long-term capital-intensive infrastructure projects.

Redoubling these efforts—and finding innovative new solution—will be critical. Some changes are already visible and taking shape. Local currency solutions provided by local financial institutions are a growing share of investment activity, particularly in infrastructure finance. Local currency Asian markets across the region have developed unevenly, but local currency markets are expanding rapidly and this trend will reduce vulnerability to exchange rate shocks.

Capital market and bond market development is also on the move and can deepen the pool of long-term capital financing. Recent landmark local currency project bond issuances have shown the way toward better connections between institutional investors and well-structured infrastructure projects in Asia. One recent example is ADB work on the first climate bond in Asia, which supported local currency bond issuance for the Tiwi-Makban geothermal power facilities in the Philippines. ADB has supported similar projects in India – and more such deals are under discussion.

Financial development is not an end in and of itself – financial sector development must also be inclusive, meaning that the poor and vulnerable must have access too. Despite having a deeper financial sector than other developing regions, Asia lags its peers in meeting the financing needs of households and firms. High-impact efforts to promote increased levels of inclusion will be necessary to contribute to sustainable economic growth.

High-quality and efficient infrastructure finance boosts investment, productivity, and growth. In the least developed economies in Asia, too little credit is channeled to the private sector and an over-allocation is made to state-owned firms. Successfully promoting the private sector to accelerate development and inclusive growth is another key for the region. 

Finally, there is an important role for multilateral development banks, including ADB, to address the infrastructure funding gap. Public-private partnerships continue to offer enormous opportunity to produce quality infrastructure and contribute to high quality inclusive growth and there is growing evidence of their success across Asia.

Discussions this week in Frankfurt won’t solve the problems of Asia’s financing gaps. But they can go a long way to making sure that the enormous amounts of finance that are available can be used more productively, more inclusively, and more sustainably.