[asia-apec 444] Statement from The APEC Finance Ministers Meeting (part 1 of 3)

[PAN Asia Pacific]

APEC Finance Ministers Meeting
Kananaskis, Alberta, Canada
May 23-24, 1998 
Joint Ministerial Statement

1. We, the Finance Ministers of the Asia-Pacific Economic
Co-operation (A PEC)[1] forum met in Kananaskis, Canada to assess
future prospects for gr owth and development within our region in
light of the Asian crisis and t o discuss policies and measures to
improve such prospects. The meeting in Kananaskis marked the fifth
time this forum has convened. 

2. We welcomed Peru, Russia and Vietnam as official observers to our
meet ing, and look forward to their induction as full member
economies in Nove mber in Malaysia. 

3. Our discussions focussed on two broad themes. The first was an
assessm ent of the current economic situation and policies to
restore financial s tability and growth, including measures to
strengthen social safety nets to help cushion the impact of the
crisis on the poor. The second was the development and
strengthening of financial markets in the region so as to reduce the
likelihood of future financial instability and to facilitate the
continued dynamic growth of the region. In this regard, we reaffirm
our commitment to doing our part to support the APEC goal of free
and open trade and investment by 2010 in developed economies and by
2020 in devel oping economies.

4. The Managing Director of the International Monetary Fund (IMF),
the Pr esident of the Asian Development Bank, and the President of
the World Ban k joined our discussions. 

5. We had a constructive dialogue with the APEC Financiers Group and
key representatives of the APEC Business Advisory Council (ABAC) and
the Paci fic Economic Co-operation Council (PECC) on measures to
encourage the res umption of private capital flows to affected
economies. We also recognize d the importance of the Year 2000
problem and urge all the economies in o ur region to take urgent
action to address this issue. We express our app reciation to the
panellists who guided discussions in those sessions.

Causes of the Financial Instability in Asia 

6. We reviewed key macroeconomic and structural issues in the APEC
region .  The financial turmoil in Asia over the past year has
affected not only the APEC region, but has also been a major source
of uncertainty in the world economic outlook generally. In this
regard, while there are many di stinct causes of the crisis in Asia,
we also noted some similarities to t he conditions leading up to the
financial instability experienced by Mexi co and other parts of Latin
America in 1994-95, such as large short-term capital inflows, growing
current account deficits as well as inadequate b anking supervision
and regulation. 

7. In the decade leading up to the Asian crisis, generally prudent
macroe conomic policies had contributed to strong economic growth
in most of the Asian economies. During the mid-1990s, however, signs
of overheating eme rged as high investor confidence and ready access
to capital fuelled exce ss domestic demand in some economies. This
contributed to asset market in flation and large current account
deficits, which were financed by large capital inflows from developed
economies. These inflows placed strains on policy and institutional
frameworks that, in the end, proved excessive f or some economies.

8. In retrospect, some economies clung too long to an unsustainable
and i ncompatible mix of exchange rate and monetary policies, even
after signs  of vulnerability had emerged. In those cases, rigid
exchange rate arrange ments and close ties to the U.S.  dollar limited
the ability of monetary p olicy to control overheating pressures and
encouraged foreign borrowing b y the private sector, often at short
maturities. The combination of these factors contributed to an
excessive accumulation of short-term, unhedged
foreign-currency-denominated debt. Inadequate supervision and
corporate governance, particularly in the financial sector,
inadequate intermediati on of foreign and domestic savings, and
government-directed lending also contributed to inefficient
investment.

9. At the same time, strong growth masked existing structural
problems, i ncluding in the financial sector. Rapid cross-border
capital flows in a g lobalized and integrated financial market also
introduced new challenges for macroeconomic management and rendered
some of these economies vulnera ble to adverse external
developments, especially sudden reversals in mark et sentiments.


10. In 1997, these problems became more apparent as a result of a
number of developments in the major industrialized economies,
including a weaken ing in import demand, particularly for key
export products from the Asian region. The U.S. dollar's rise in
value against major currencies may hav e also played a role in a
loss of competitiveness of the region's exports . 

11. Although the situations of individual economies varied across
the reg ion, instability tended to spread to economies that markets
perceived to  have similar vulnerabilities. In some cases, a lack of
transparency in fi nancial systems contributed to these market
perceptions. We also note tha t in some cases markets did not appear
to differentiate appropriately on  the basis of available information
about the economic fundamentals of the se economies. 

12. We agreed that speculation in financial markets was not the root
caus e of the turmoil, although it may have played a role in
exacerbating herd ing behaviour and spreading volatility. We took
note of the useful work d one by the IMF in its study "Hedge Funds
and Financial Market Dynamics."  We agreed to keep these issues,
including the role of institutional inves tors and their investment
behaviour, under consideration in our future me etings, with
contributions as appropriate by the IMF. 
 
13. In our discussions, we focussed on two dimensions of the
response to the recent turmoil. The first was the challenge of
restoring stability an d promoting recovery in the affected
economies. The second involved reinf orcing our financial systems,
and indeed the global financial system, so as to reduce the
likelihood of future recurrences.

Restoring Stability and Promoting Recovery

14. We acknowledge the crisis is a global problem with regional
manifesta tions. In reaffirming the central role of the IMF, we echo
our APEC Econo mic Leaders call in Vancouver regarding the Manila
Framework for Enhanced Asian Regional Co-operation to Promote
Financial Stability, and we welco me developments that support that
call, including the formation of region al economic surveillance
mechanisms.

15. We endorse the approach of the IMF, the World Bank and the Asian
Deve lopment Bank in addressing the financial instability in Asia. We
applaud the efforts of these multilateral institutions and bilateral
donors to pr ovide valuable financial and technical assistance to
Thailand, Indonesia and Korea to help them meet the numerous
challenges they face including c orporate and financial
restructuring, balance of payments difficulties, t rade financing
needs and the severe social effects of the recent financia l
turmoil. We welcome the IMF's creation of the Supplemental Reserve
Faci lity, to help address problems posed by sudden changes of
market sentimen t toward individual or groups of economies. We also
welcome the enhanced financial resources provided by the Japan
Special Funds, at the World Ban k and the Asian Development Bank,
and the ASEM trust fund, at the World B ank, for assisting
economies in dealing with the effects of the recent cr isis.

16. We call for the early ratification of the increase in quotas
approved by the Board of Governors in January 1998 and of the New
Arrangements to Borrow in order to ensure that the IMF has adequate
resources to respond to any spread or intensification of the current
crisis and to handle fut ure crises.

17. We commend those economies in the Asian region that have taken
diffic ult and courageous measures to deal with the causes of the
instability. W e welcome signs of improved prospects in Thailand
and Korea as implementa tion of their IMF-supported economic
programs has progressed. We expresse d deep concerns about the
recent economic and social situation in Indones ia. We welcome the
new President's support for political and economic ref orm and his
commitment to implement the recently-strengthened IMF-support ed
program.

We look forward to progress toward economic and political conditions
that will permit the restoration of confidence that is essential for
recovery . Overall, the long-term fundamentals in the region remain
strong and we are confident that the region will regain its
dynamism. We agree, however , that there is no room for complacency
as difficult adjustments and chal lenges remain.

18. We note the continuing importance of long-term capital flows,
particu larly foreign direct investments, for growth in the Asian
region. We disc ussed this in our joint session with the APEC
Financiers Group and conclu ded that a sustained resumption will
require not only a stabilised macroe conomic and exchange rate
environment, but also significant reforms in th e corporate and
financial sectors and improvements in the transparency of market
arrangements.

We have also noted that those economies that have undertaken these
reform s earlier have been able to weather the crisis better and
maintain invest or confidence. The Philippines, for example, was
the first Asian sovereig n borrower to tap the international
capital markets after the onset of th e financial turmoil in Asia.
Korea and Thailand, which have shown their s teady and strong
commitment to reforms, have seen improvements in the val ue of
their currencies and have recently returned to international
capital markets.

19. The recent instability has, however, left financial sectors in
the re gion severely weakened, with a large stock of non-performing
loans and an increased burden of foreign currency debt. Forceful
action to restore he alth to domestic financial systems in many
economies is clearly vital for the resumption of capital flows and
growth. We endorse the work the Worl d Bank and the Asian
Development Bank are carrying out in supporting the affected Asian
economies to reform and strengthen their financial systems and
promote sound corporate restructuring.

20. We especially took note of the social impact of the turmoil and
the a djustment policies necessitated by it. In the coming months, as
companies restructure, the level of unemployment in a number of
economies may rise even further. The situation is placing strains on
the social fabric and the burden in many cases falls on the poorer
segments of society and thos e least able to protect themselves,
especially women and children. In Ind onesia there is even evidence
of food shortages and inadequate medical su pplies.  

21. These problems make it important to expand and strengthen social
safe ty nets and other forms of support that exist in these
economies. In this regard, we applaud the efforts of the ADB and the
World Bank to date to help the affected economies deal with the
social impact of the turmoil. W e also recognized the flexibility
that the IMF has shown in adapting its program requirements to
changing economic and social circumstances in the region. We urge
these institutions to continue to look for innovative wa ys of
offering support for those hardest hit by the instability.

22. It will also be important for international financial
institutions to consider ways to support environmental protection in
these economies as they respond to the crisis.

23. We welcome the efforts by those APEC economies less affected by
the i nstability to support economies' prospects in the region as a
whole by pu rsuing policies that promote domestically-led growth. We
commend those AP EC economies that have demonstrated their policy
commitment to maintain s tability of their exchange rates, thereby
helping to restore confidence i n this region. We encourage all
economies to maintain movement towards op en markets.  In this
context, as called for by APEC Economic Leaders in Va ncouver, we
appreciate efforts by other APEC fora towards early voluntary
sectoral liberalization, in the areas on tariffs, non-tariff
measures, t rade facilitation, and economic and technical
co-operation.

24. We recognized that adequate access to trade financing is
imperative t o allow industries to import needed inputs to
facilitate the recovery of domestic production. In this regard, we
welcome efforts by the OECD and r egional governments to maintain
and expand existing official export finan cing programs designed so
that economies undertaking IMF-supported adjust ment programs do
not experience unnecessary disruptions in their trade fl ows. We
encourage the ADB and the World Bank to look for appropriate ways 
in which they may support the restoration of financing for small-
and me dium-sized companies in affected economies, as the ADB is
already doing i n Thailand through the use of credit enhancements.
We strongly urge our p rivate sectors to base their assessment of
individual banks' credit-worth iness on the relevant facts and not
on any simple regional formula. In ad dition, we noted that the
private sector (both creditors and debtors) sho uld be encouraged
to play a greater role in the resolution of financial c rises.