Opening Remarks by
Dato’ Seri Ranjit Ajit Singh
Chairman of Securities Commission Malaysia
at the Global Emerging Markets Conference 2016
Risk and Vulnerability of Global Markets: Reinforcing Resilience
in Emerging Markets
15 March 2016, Securities Commission Malaysia, Kuala Lumpur
Excellencies, esteemed speakers, distinguished guests, members of the media, ladies and gentlemen,
- Let me begin by welcoming all of you to the first Global Emerging Markets Programme (GEMP) Conference 2016. I would like to thank our speakers and participants for making time to be here. As many of you are aware, we have conducted the annual regulatory Emerging Markets Programme (EMP) since 2001, and have had over 500 regulators from close to 70 countries attend the sessions. The EMP today remains the longest standing platform for emerging regulators to gain regulatory and technical perspectives on issues affecting global capital markets.
- As we have been very fortunate to have had very high quality speakers that participate annually in the EMP, including the frank and robust discussions that take place, we felt that it would be a good opportunity to expand the programme to a wider cross-section of the industry and regulatory stakeholders through this one-day conference, which will feature as an annual event.
- I am indeed delighted today to see such strong participation from delegates from 23 countries as well as senior regulators and market participants from within and outside the region attend this event. We also have an excellent set of speakers at today’s Conference, who have taken time out of their extremely busy schedules to be with us, and I am very grateful to all of them for making time to be here.
- Let me extend a very warm welcome to all of you.
Emerging markets in review
Ladies and Gentlemen
- Emerging markets are a significant global asset class, collectively making up 22% of global capital markets, growing from less than 7% twenty years ago. Emerging economies now contribute nearly 60% of global GDP1, and in general have experienced stronger economic growth trends than developed markets. They are also estimated2 to grow at double the pace of advanced countries.
- The significance of emerging markets cannot therefore be under-estimated, and this was reinforced by IMF’s Managing Director Christine Lagarde in a recent speech where she said: “Emerging markets matter for the global economy, and the economic health of the emerging world is of first-order importance for the advanced economies”.
- It has been observed that emerging markets have also been the main recipients of record capital inflows following quantitative easing programmes embarked upon by developed economies. From 2010 to 2012, the Institute of International Finance estimated that USD927.9 billion of foreign portfolio investments were allocated to emerging markets. The subsequent reversal of these significant portfolio inflows triggered much of the volatility observed in emerging markets over the past two years.
- The first of such adjustments occurred in the second half of 2013. In an immediate reaction to what we now call the taper tantrum, emerging equity markets recorded portfolio outflows of USD16.7 billion in the second quarter of 2013, while emerging market bonds saw sharp spikes in yields.
- The uncertainty over the timing of the US Fed interest rate hike continued to be a predominant theme going into 2014 and for much of last year. Emerging markets’ vulnerability to foreign outflows was again apparent in the second half of 2015 when significant downward price adjustments in global equity markets prompted foreign investors to withdraw a total of USD46.5 billion from emerging market equity and bonds during this period. With a heightened risk environment moving forward, this suggests that emerging markets continue to remain vigilant to investor sentiments and foreign outflows in the short term.
- I am certain Dr. Mark Mobius, the well-renowned Emerging Markets guru will share his insights and perspectives in his special address later this morning. Mark has been investing in global emerging markets for more than 40 years, and will undoubtedly share his wisdom on the outlook and opportunities in respect of emerging markets.
Fostering trust and confidence
Ladies and Gentlemen,
- Cyclical headwinds and exogenous shocks are inherent in any modern globally-interconnected financial system, and it is critical that markets are able to withstand global volatility while deterring activities that may undermine the legitimate interests of market participants as well as the systemic integrity of the market.
- Within the context of capital markets, I believe there are two key imperatives for regulators. The first is a strong focus and commitment to maintaining trust and confidence in the market. This, in my view, forms the bedrock of a modern and well-functioning capital market.
- Amidst a volatile climate and an increasingly connected, complex and global marketplace, preserving trust and confidence in capital markets is absolutely critical. Markets are influenced by a whole host of factors and potential transmission channels for vulnerabilities can arise in multiple ways. Further, as evidenced by past crises and periods of market stress, investors may be prone to withdrawing from emerging markets rather than diversifying into other asset classes within emerging markets – thereby creating further sources of stress.
- In anchoring trust and confidence, high standards of market conduct, governance and ethics are paramount. Good governance practices create quality markets and is oneof the most important factors influencing investor confidence, particularly given the increasing competition for capital in current markets.
Strengthening resilience in capital markets
- The second major imperative for regulators and policy makers is to build resilience against external shocks and market stress.
- Policymakers and regulators cannot try and influence the direction of the market. That is for the market to determine on the basis of a wide range of factors including long-term economic prospects, investor sentiments, the quality of markets, strength of institutional structures and other exogenous factors.
- It is important however for policy makers to build markets that are able to withstand volatility and shocks, while playing a key role in facilitating capital formation and promoting investment opportunities that can contribute to long-term and sustainable growth of the economy.
- There is a need therefore to put in place the right regulatory and institutional foundations, including investor safeguards, rules that govern systemically important market infrastructures and mechanisms to promote orderly market conditions.
Ladies and gentlemen,
- This Conference is taking place at an opportune time. As the Chair of IOSCO’s Growth and Emerging Markets Committee, IOSCO’s largest Committee with close to 100 members responsible for overseeing approximately USD19 trillion in aggregate market capitalisation, we regularly share risks and vulnerabilities facing emerging markets, and ways to improve monitoring and cross-border coordination.
- Our discussions with leading emerging market specialists reinforce the pointthat emerging markets are clearly not viewed as a homogenous group, and global investors often make a distinction among markets where there is sound regulatory architecture; robust market infrastructure; strong institutional capabilities and high standards of corporate governance.
- As we intensify efforts to strengthen these fundamentals, this must be complemented by initiatives to broaden and deepen the capital market as well as to foster new growth areas. Given the growing shift towards market based financing, this involves promoting a more diverse and innovative intermediation environment which can cater to the varying needs of issuers and investors. The development of deep and liquid corporate bond markets, for example, provides an avenue for domestic issuers to obtain long-dated local currency financing – thus reducing their reliance on external financing. Further, having a large domestic institutional investor base facilitates more efficient capital mobilisation and engenders greater market resilience through their long-term investment horizons.
Malaysian capital market – weathering the headwinds
Ladies and gentlemen,
- Notwithstanding the recent market pressures on emerging markets globally, the Malaysian capital market has remained relatively resilient, and continues to be a major source of financing for the economy.
- In 2015, the capital market grew to RM2.82 trillion, equivalent to 2.5 times the size of the domestic economy. This expansion attests to the sustained ability for issuers to obtain long-term financing from the Malaysian capital market, as fundraising activity remained robust throughout the year with RM90 billion raised through the primary market3 with an additional 17 billion in secondary issuances through the equity market in an environment that saw a decline of 26.5 percent in funds raised from global IPOs. This was the fourth year in a row that there was RM90 billion raised through the primary market.
- Growth was also observed across all market segments. The equity market capitalisation increased to RM1.7 trillion in 2015 from RM1.65 trillion the previous year, while the bond and sukuk market grew by 1.4% to RM1.12 trillion. The fund management industry maintained its upward growth trajectory with assets under management by fund management companies rising by 6% to RM668 billion in 2015. The size of the Islamic Capital Market grew to RM1.7 trillion, with Malaysia remaining the leader in the global sukuk market commanding close to 55% of global sukuk outstanding.
Ladies and gentlemen,
- Markets today are increasingly complex with the growing interconnectedness and prevailing global uncertainties invariably adding to the complexities. Combined with ongoing financial innovation and digitisation, as well as new and emerging risks including cyber security threats, these can have an adverse impact on markets.
- As a consequence, the demands on regulation have also intensified. The current challenge is tonot make regulation complex but to focus on ensuring integrity and soundness of the capital market.
- As regulators, it is therefore critical that we continue with ongoing efforts to enhance market efficiency through regulatory reforms, while intensifying systemic surveillance efforts on potential risks and vulnerabilities which may affect the market.
- It is also important to provide policy certainty and clarity to ensure that risks are not amplified in markets that are already operating in an uncertain environment. Both global and domestic investors need to have a full understanding of the intentions and actions of policy makers so that informed assessments can be made as to the risks inherent in any particular investment choice.
- Thank you for your attention, and I look forward to the discussions.
1 Speech by Christine Lagarde, Managing Director, IMF (February 4, 2016)
2 Global Economic Prospects, January 2016, The World Bank
3 Private debt issuances and IPOs