After its fourth Asia-Pacific regional meeting, the Financial Stability Forum indicated that the global economic outlook is good, although it pointed to a number of possible challenges.

The meeting, held in Sydney, involved senior representatives from finance ministries, central banks and supervisory and regulatory authorities from 10 FSF member economies and eight regional non-member economies. Canada was represented by the Ministry of Finance, Bank of Canada, and the Office of the Superintendent of Financial Institutions.

“Participants exchanged views on the outlook for the global and regional economies, which remains good. They noted that benign global economic and financial conditions in recent years have supported growth and financial markets in the Asia-Pacific region,” the FSF reported. “These conditions, together with a build-up of foreign exchange reserves, the adoption of more flexible exchange rate arrangements and strengthened financial systems, have enabled countries in the region to reduce external vulnerabilities. They have supported efforts to strengthen local financial and corporate sector balance sheets, although the pace of progress varies from country to country. Regulatory and supervisory frameworks have been enhanced.”

However, the participants also highlighted several challenges, including high oil and other commodity prices. “They pointed to high risk appetites on the part of investors, as evidenced by risk spreads that not only are historically low but also show little dispersion among borrowers,” it noted. “While low spreads largely reflect improved fundamentals, a sudden reversal in risk appetites, especially if it were accompanied by unexpected increases in global bond yields or a sharp increase in asset price volatility, could alter the current positive outlook for financial stability.”

“In the context of concerns about persistent global imbalances, participants noted efforts by authorities in the region to increase domestic absorption, through stronger domestic consumption and investment, and intentions elsewhere to increase national savings. They noted that lending to households has risen rapidly recently in some economies, supporting consumption, but they stressed the need for lenders to assess carefully the risks arising from such lending to ensure it does not jeopardise stability,” it said.

“Investment, including for needed infrastructure, could be strengthened by better developed domestic corporate bond markets,” the FSF added. “Bond markets add to the diversity of channels for saving and financing in domestic financial systems, most of which are still largely dependent on banks. Participants noted a number of national and regional initiatives that are underway to foster development of these markets.”

Participants also shared their assessments of the potential impact of a flu pandemic on their economies and financial systems. “They agreed on the need for business continuity planning, focusing in particular on maintenance of the operation of payments systems, and stressed the importance of effective communication in the event of a pandemic. They discussed areas in which there may be scope for risk-mitigating actions, including steps that financial authorities in individual countries in the region are already taking to ensure that their financial sectors prepare for such an event,” it related.

The meeting’s participants noted progress toward convergence and harmonization in international accounting standards and welcomed efforts by regulators and audit oversight authorities to promote more effective cooperation and enhancements to audit quality.