Strengthening Resilience to Challenges Ahead

Since the publication of the inaugural ASEAN+3 Financial Stability Report (AFSR) in late 2023, some risks to the region’s financial systems have subsided, while others have intensified. This year’s AFSR takes a more comprehensive approach, addressing a broader array of risks and challenges facing the region in the coming period. It includes three in-depth thematic studies that examine key risks—financial contagion, property developer financing, and heavy reliance on the US dollar for cross-border transactions—while offering policy recommendations to address these issues.

Chapter 1: Recent Developments and Market Trends

Global market volatility increased in the third quarter of 2024, fuelled by shifting expectations of Fed policy, the eventual onset of monetary easing, US growth outlook, technology stock fluctuations, and geopolitical risks.

In ASEAN+3, inflation resurgence remains a key risk to macro-financial stability, with policy responses expected to vary based on domestic factors. US growth concerns amid high inflation could further complicate policy and tighten financial conditions. Growing interconnectedness within and outside ASEAN+3 has heightened vulnerability to global risk factors. Intra-regional linkages also transmit shocks across ASEAN+3 economies. As regional financial systems become increasingly interconnected, robust regional surveillance and cooperation are crucial.

Chapter 2: Vulnerabilities and Potential Spillovers Stemming from Property Developer Financing

The outlook for the real estate market in the ASEAN+3 region has deteriorated since the COVID-19 pandemic, with reduced prices and transaction volumes across several economies. The downturn, combined with a tighter financial environment, has heightened vulnerabilities among property developers. Although spillovers to the broader banking sector have been limited, hidden or less visible risks from smaller local banks and shadow banking activities related to the property sector lurk, warranting careful monitoring. It is crucial for policymakers to establish a resilient framework that supports viable property projects facing liquidity shortages, while ensuring soundness in the property and financial sectors.

Chapter 3: Implications of US Dollar Reliance in ASEAN+3

The US dollar plays a crucial role in ASEAN+3’s cross-border macro-financial system. The region's reliance on the US dollar creates two key risks. First, a shortage of US dollars can heighten stability risks for financial markets and intermediaries. Second, it acts as a transmission channel for shocks stemming from US monetary policy, geopolitical tensions, and other global developments.

In the short term, building economic resilience against global spillovers and strengthening financial sector surveillance and risk management are critical. In the long term, diversifying away from the dominant use of US dollar to a wider range of other currencies, including local currencies within the ASEAN+3 region, and adopting technological solutions can enhance stability.