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Memorandum To APEC Leaders

In advance of the forthcoming APEC Economic Leaders’ Meeting in Auckland on 12/13 September, and on behalf of my colleagues I am pleased to submit the report of the 6th APEC Finance Ministers’ Meeting held in Langkawi, Malaysia on 15/16 May 1999, as well as a brief update on subsequent developments.

At their meeting in Langkawi, Ministers reviewed the regional economic and financial situation. They considered ways to strengthen economic fundamentals to accelerate the recovery process, and to address longer-term challenges.

Ministers were encouraged by the improvements in the economic and financial situation in the crisis-affected Asian economies. They congratulated economies that had made courageous efforts to respond to the financial crisis by undertaking the necessary policy adjustments to promote early stabilisation and recovery, and to embark on the necessary reforms to address the vulnerabilities that caused the crisis. Maintaining this commitment to policy adjustment and structural reforms, particularly in the corporate and financial sectors, remains a high priority.

At their meeting last year, APEC Leaders endorsed a co-operative growth strategy. Ministers noted that the strategy has yielded significant progress in promoting recovery and growth, and to sustain and deepen this progress urged member economies to keep markets open and to continue efforts towards furthering free and open trade and investment liberalisation including through multilateral discussions. In this regard, Ministers reaffirmed the value of peer surveillance within APEC economies and the benefits to be derived from greater co-operative efforts at the micro level, particularly in financial and capital markets.

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In pursuit of the co-operative growth strategy, Ministers supported further collaborative action within APEC to exchange information and analysis on strategies to mitigate the impact of the crisis on the poor. They also noted considerable progress made in corporate and financial sector restructuring across the region, not least through the mobilisation of technical and financial support by the multilateral development banks and other regional partners. Ministers reaffirmed that these efforts, in combination with sound macroeconomic management, measures to strengthen the financial system and efforts to enhance corporate governance and create an environment conducive to foreign direct investment could contribute to a return of capital flows to the region.

Ministers wish to underscore that the Year 2000 Problem (Y2K) is an issue of immediate and great concern for APEC economies. While all APEC economies are now taking the Y2K problem seriously, there are real prospects that significant business disruptions may occur during the century date change. As the year-end approaches great emphasis must be placed on contingency planning in the critical sectors and on more disclosure by both public and private sectors as to their Y2K preparedness. Building public confidence about APEC economies’ ability to deal with Y2K is of central importance as well, and Ministers believe APEC Leaders can make a great contribution in this regard through well-timed public statements.

Strengthening the Foundations for Sustainable Growth

Ministers remain committed to their longer-term objective of strengthening the foundations for sustainable growth, and in particular promoting the further development of robust financial and capital markets. Specific actions endorsed by Ministers include:

Encouraging early and comprehensive implementation of the recommendations contained in the report "Strengthening Corporate Governance in the APEC Region" taking into account each economy’s specific circumstances. This report provides a set of possible directions for corporate governance reforms and recommends adoption of individual member voluntary action plans to give effect to this commitment.
Promoting sound financial systems by strengthening the quality of existing auditing and accounting standards, and moving towards the adoption of practices that meet or exceed international standards.
Ongoing work to improve the coordination and delivery of training for bank supervisors and securities regulators.
The further elaboration of APEC’s voluntary principles for facilitating private sector participation in infrastructure.

Beyond the Financial Crisis: Meeting the Challenges and Opportunities

Ministers noted that considerable progress is being made on measures to strengthen the international financial system, and welcomed efforts to involve a broader range of economies in the ongoing dialogue. To ensure that momentum is maintained, they instructed Deputies to prepare a report summarising developments in the areas identified by Leaders in their November 1998 meeting. That report is enclosed with this letter.

Ministers welcomed the Report on the Compendium of Sound Practices prepared by the Collaborative Initiative on the Development of Domestic Bond Markets. Ministers noted that the Compendium could serve as a useful tool for self-assessment and promotion of the development of domestic bond markets.

Ministers have identified the following themes for their work in the coming year:

Robust Open Economies – with two broad components - building reliable and efficient markets, including strengthening financial markets, and promoting sound economic and corporate governance.
Strengthening the Global Financial System – contributing our region’s views on the wider efforts taking place to strengthen the international financial system and facilitate the shared goals of stability and growth.
Credibility and Effectiveness – continuing efforts to improve links between the Finance Ministers and other APEC processes.
Together these three themes will contribute to our objective of building robust open economies in the APEC region consistent with APEC’s founding vision for an Asia-Pacific region that harnesses the energy of its diverse economies, strengthens cooperation, and promotes prosperity through free trade and investment.

The 7th APEC Finance Ministers process will be co-chaired by New Zealand and Brunei Darussalam so that Finance Ministers will in future meet in the period immediately preceding the APEC Leaders meeting. This will help to improve cooperation within the overall APEC agenda.

With respect to Y2K, Ministers recommend that APEC central banks and finance regulatory authorities responsible for the Y2K confer about:

Arrangements to address possible extra cash and liquidity demand around the century rollover; and
Contingency plans to assure that possible cross-border disruptions involving the financial sector or payment and settlement systems will be dealt with and therefore will have minimal impact on financial institutions and the general public.
For the year ahead, Ministers have endorsed a work programme including:

Specific proposals for implementing a voluntary action plan to support freer and stable capital flows, building on strong financial systems that are fundamental for robust open economies, taking account of economies’ experiences in managing the process of capital account liberalisation.
The compilation of a compendium of international standards, codes and best practices to strengthen financial systems and the development of an approach to track progress in implementing voluntary principles and action plans to strengthen financial systems.
Work on insolvency law reforms, including a workshop on insolvency law.
A forum to share experiences of privatisation.
Further work in developing deep and liquid bond markets in the region, in collaboration with the private sector and encouraging the sharing of information through the newly inaugurated web site established for this purpose.
Further work on the forum to deepen pension reform focusing on the Asian experience.
Further work on surveying the codes of practice currently in use by credit rating agencies and identifying actions to strengthen disclosure practices by our economies.
A working group, in collaboration with the World Bank and the ADB, to explore ways of strengthening social safety nets in a framework integrating poverty reduction into growth-oriented macroeconomic policies.

Developments since May 1999

Since the Ministerial meeting growth prospects for APEC economies have continued to improve.

Although growth in the US economy slowed in the 2nd quarter, domestic demand remains strong and growth is expected to be 3-4% for 1999 as a whole.

The outlook for the Latin American APEC members on balance has improved in recent months reflecting improved investor confidence and some firming in commodity prices.

Many Asian economies have seen significant improvements to their growth performance. Korea has experienced the most dramatic turnaround, while Malaysia, the Philippines, Singapore and Thailand are also seeing a return to positive annual growth in the first half of 1999. China’s growth is well maintained, but its sustainability will need continued implementation of its stimulus package. The other non-Japan Asian economies have experienced continued or stronger growth, or in a few cases, a slowing in the pace of contraction, with the change in Indonesia being particularly impressive. Japan’s exceptionally strong growth in the first quarter has contributed to increased expectations for a sustained return to positive growth-.

While the recovery in APEC economies since the crisis is very encouraging, it is important to recognise both the reality of the crisis, and the remaining risks to recovery. Wealth of individuals, companies and the financial institutions that lent to them has been destroyed. Until the impacts of the crisis have fully worked their way through the economies, the behaviour of domestic investors and financial institutions will be constrained. The crisis economies and other APEC economies have responded with determined economic reform programmes. A sustained long-term recovery in the APEC economies will require not only a continuation and intensification of those domestic reform programmes, but also policies that both sustain growth and constrain inflation in the major economies.

As we noted at Langkawi, there is an emerging consensus about key elements of a strengthened international financial system. APEC, as a group representing a wide range of economies including most of those seriously impacted by the crisis of 1997-98, has made a unique contribution to the discussions about international financial architecture. We welcome the creation of the Financial Stability Forum (FSF), and its expansion to include three additional members from APEC.

We support and attach great importance to the useful work being done in various international fora in seeking to enhance risk management, in particular counterparty risk management, and to improve the transparency of the HLIs. In this regard, we welcome the initiatives of the FSF to set up three Working Groups to study: the role and activities of HLIs, including their impact on the market dynamics of small and medium-sized economies; capital flows; and off-shore financial centres. We look forward to the report of these working groups and to the prompt and effective implementation of their recommendations, particularly as they pertain to adequate transparency and disclosure standards of the private sector in the interest of the smooth functioning and integrity of financial markets.

We welcome the proposed establishment of an informal mechanism for dialogue among systemically important countries within the framework of the Bretton Woods institutions.

We stress the importance of broad-based participation of emerging market economies in the process of reforming the international financial architecture, which enhances its credibility and success of the exercise.

We look forward to discussions of progress on the international financial architecture at the IMF/World Bank Annual meetings.

We wish you much success for your meeting in Auckland, and look forward to reporting the outcomes of our efforts at your next meeting in Brunei Darussalam in the next millennium.

Hon Bill English
Treasurer and Lead-Chair
APEC Finance Ministers

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