REPORT TO APEC ECONOMIC LEADERS ON THE RECENT ACTIVITIES OF THE
APEC FINANCE MINISTERS

The Finance Ministers of the Asia Pacific Economic Co-operation (APEC) met for the sixth time in Langkawi, Malaysia to review the economic and financial situation in the region, explore ways to strengthen economic fundamentals to accelerate the recovery process, and to look towards meeting longer-term challenges. Given the increasingly integrated global environment, we underscored the individual and collective roles of economies in contributing to regional and global stability. We resolved to work together to further sustain the recovery now underway in the region. We reiterated our commitment to persevere with macroeconomic and structural reforms in meeting the challenges ahead and to co-operate within APEC and to contribute in other fora to strengthen the international financial architecture.

MACROECONOMIC DEVELOPMENTS
Economic and Financial Situation
We were encouraged by improvements in the economic and financial situation in the crisis-affected Asian economies of Indonesia, Korea, Malaysia, the Philippines and Thailand, although some downside risks remain and underscored the importance of continuing with policy adjustment and structural reforms, particularly in the financial and corporate sectors. Growth is expected to pick up this year in all these crisis-affected economies. The return of stability to financial markets has allowed the easing of monetary policy, which in combination with stimulative fiscal policy has supported domestic demand and production. But while fiscal and monetary policy should remain focused on supporting recovery, subject to financial stability, it is important that these economies remain committed to structural reforms that will strengthen their longer-term growth prospects. In Russia, economic activity has been recovering from the low point in September. Nevertheless, vigorous action is needed to tackle the fiscal and structural causes of the crisis.
In the United States, economic growth has remained buoyant. Policies should be directed at sustainable non-inflationary growth. In Japan, fiscal policy is providing sizeable stimulus, short-term interest rates have been pushed close to zero, and bank recapitalisation has eased financial sector strains. Policies need to be supportive until deflationary pressures ease and a revival of private demand is firmly underway. Continued structural reforms will be key to sustaining growth over the medium and long terms. In China, growth has been well maintained, assisted by a stimulative policy stance. We welcomed the commitment and effort China is making to reform the financial sector and state-owned enterprise for sustainable development.
While not unaffected by the Asian and global financial crisis, most of the other APEC economies have managed to sustain growth or adjusted reasonably well and avoided major disruption. Given the Brazilian crisis, this is now particularly noteworthy in the three Latin American members. Economies must continue with policies that support the recovery now underway in the region.
Along with efforts by APEC, Europe should play its part in sustaining global growth, including through supporting domestic activity and structural reforms. It is also important that open markets are maintained around the world.

PURSUING THE COOPERATIVE GROWTH STRATEGY
We recalled that APEC Leaders, at their Meeting on 18 November 1998 in Kuala Lumpur, endorsed a co-operative growth strategy to meet the challenges of ensuring macroeconomic stability and restoring growth in the region. The strategy has yielded significant progress in promoting recovery and growth. However, we will not become complacent in meeting the challenges ahead to sustain and deepen this progress. Member economies were urged to keep markets open consistent with the commitment made by Leaders and to continue with efforts towards free and open trade and investment. We noted the supportive environment provided by the major economies to the co-operative growth strategy endorsed by Leaders. The recent crisis has demonstrated the importance of addressing the issues related to exchange rate regimes. We noted that the choice of exchange rate arrangements may vary across economies, however, consistent policies and robust financial systems must support any regime adopted. The IMF has been asked to further consider the issue of appropriate exchange rate arrangements.
We recognised the value of peer surveillance among APEC member economies and agreed that our exchange of views complements surveillance by the IMF. At the same time, there are benefits to be derived from greater co-operative efforts at the micro level, particularly in financial and capital markets.

Mitigating the Impact of the Crisis on the Poor
We remained concerned about unemployment and hardship among the poor and the vulnerable as a result of the crisis. In some economies, social strains have posed a risk to recovery. In the crisis-affected economies, authorities have responded through a variety of mechanisms to minimise the adverse impact of the crisis on these groups. As noted in the background paper prepared by Malaysia and the World Bank, the experience in East Asia and that of crisis-affected Latin American economies has provided important lessons. They included the need for greater co-ordination among the relevant national agencies, as well as between these agencies and international financial institutions in the design of programmes; the importance of having the best possible safety nets in place even before a crisis; and the institutional capacity to rapidly adjust programmes and introduce measures in times of crises, as well as the need to improve the monitoring of programmes.
APEC can contribute to further collaborative work in areas under our competence. By investing in health, education, sanitation and jobs for the poor, economies make an investment in the healthy, productive workforce that is necessary for sustainable growth and social well-being. We welcomed the country-specific assistance, both technical and financial, being provided by the World Bank and the Asian Development Bank to promote the sound design and adequate internal financing of national social safety nets, taking into account the cultural, economic, institutional and social situation of the individual economies.
This collaborative work could build on the findings of the Regional Meeting on Social Issues Arising from the East Asian Crisis (Bangkok, 21-22 January 1999) and the Ministerial Meeting of Development Co-operation (Sydney, 5 March 1999). The establishment of the Asia Recovery Information Centre to facilitate the collaborative exchange of information and analyses was welcomed.

Restructuring Financial and Corporate Sectors
We noted the progress of financial and corporate restructuring in the crisis-affected economies but important challenges remain. We commended the efforts taken by Indonesia, Korea, Malaysia and Thailand to establish frameworks for recapitalising viable financial institutions and resolving non-viable ones, and the continuing efforts by these countries and the Philippines in further improving prudential regulation and supervision. On the corporate side, voluntary restructuring frameworks have been adopted and many legal impediments to corporate restructuring have been removed. 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 would contribute to a return of capital flows to the region.
The international community can play an important role in expediting the restructuring process through technical and financial support, including through multilateral development banks and the IMF. We welcomed the financial support extended by Japan to a number of crisis-affected economies under the New Miyazawa Initiative and the multilateral initiative to revitalise private sector growth announced in Kuala Lumpur, Malaysia on 17 November 1998 by Japan and the US in conjunction with the ADB and World Bank.

STRENGTHENING THE FOUNDATIONS FOR SUSTAINABLE GROWTH
The crisis had reinforced our commitment to our longer-term objective of strengthening the foundations for sustainable growth, particularly efforts to promote the further development of financial and capital markets to finance private investment and infrastructure development.

Developing Financial and Capital Markets
Sound financial systems; corporate governance and improved accounting; transparency and disclosure standards are central to restoring the confidence of domestic and international investors and the return of capital flows. We noted the progress in developing a voluntary action plan to support freer and more stable capital flows in the APEC region and looked forward to receiving a report setting out specific proposals at our next meeting. We took note of the recent IMF report on the experiences of various economies on the use of controls on capital movements and macro-prudential measures and in managing the process of capital account liberalisation.
On corporate governance, high priority was given to domestic reform measures and we endorsed the recommendations contained in the report "Strengthening Corporate Governance in the APEC region". We encouraged economies to undertake early and comprehensive implementation of the recommendations taking into account their specific circumstances. We took note of the work by the OECD task force on the principles of corporate governance. We also agreed that at our next meeting, economies, on a voluntary basis, report on progress of measures taken to strengthen corporate governance. We endorsed the importance of education and training to strengthen the body of skilled professionals working as accountants, auditors, company directors, regulators, and in the judicial system. We welcomed Australia's provision of a compendium on its corporate governance training facilities.
We urged member economies to strengthen, where relevant, the quality of existing auditing and accounting standards, and move towards the adoption of practices that meet or exceed international standards. We welcomed the work of the International Accounting Standards Committee to develop a full range of accounting standards, which could facilitate informed decisions by the investing public by promoting full, fair, and complete financial reporting.
Given the financial crisis, we agreed that insolvency law reforms are particularly important to the speedy restructuring of business and financial sectors and better future management of credit flows to private borrowers. A joint APEC-OECD workshop on insolvency law to be hosted by Australia later this year.
We recognised the need for further work on the development of deep and liquid domestic bond markets in the region, including developing reliable benchmark yield curves, improving securities clearing and settlement systems and addressing the issues of lack of liquidity and inadequate risk assessment. We welcomed the compendium of sound practices and the establishment of a web site to facilitate information sharing among member economies. We acknowledged the recommendations of the private sector in support of our work on bond markets and directed our Deputies to study these recommendations in collaboration with the private sector.

Pension Funds
A second regional forum on pension fund reform was organised by Chile and Mexico in April 1999 in Vina del Mar. Issues discussed in the forum were related to pension systems such as individual policies, costs of the transition from public to private system and its possible financing, the role of specialised institutions in pension fund administration and the performance of the public sector as a safety net provider. We acknowledged the importance of these issues when instituting reforms to pension fund systems in our economies.

Revitalising Infrastructure
Infrastructure financing poses an important challenge for the region especially under the prevailing financial environment. In 1997 in Cebu, we agreed to a set of voluntary principles for facilitating private sector participation in infrastructure. The ADB’s report entitled "Private Sector Participation and Infrastructure Investment in Asia: The Impact of the Crisis" took into account the changed circumstances for financing of infrastructure projects in the region. While the financial crisis did affect the region’s investment requirements for infrastructure projects, these were still in an order of magnitude that made a substantial private sector involvement imperative. The crisis underscored the urgency of a wide application of the voluntary principles adopted two years ago. The recommendations contained in the report included:(i) the need for governments to concentrate on planning, policy and regulation, and to involve the private sector in the development and operation of infrastructure facilities; (ii) the advantages of unbundling infrastructure services and introducing competition; (iii) the urgency of accelerating the development of domestic capital markets, in particular bond markets, to avoid currency and maturity mismatches in the future; and (iv) the need to introduce independent, transparent and consistent legal and regulatory regimes.
As part of efforts to promote privatisation across the region, we welcomed the APEC privatisation forum initiative. The inaugural meeting of the forum will be held in Bangkok in November 1999.

Y2K
We noted the work of APEC member economies to prepare for the computer date change on 1 January 2000. APEC economies need to continue to upgrade and test their computers in preparation for the year 2000 to enhance public confidence and reduce the risk of economic and financial disruptions. Efforts in the months remaining to the year 2000 should be increasingly directed toward planning for possible contingencies that may arise at the time of the century date change. We welcomed the initiative by Japan in organising the APEC Y2K Week and a training programme for member economies. We took note of the intention to review this subject at the APEC Leaders Meeting in Auckland and attached particular importance to this work.

BEYOND THE FINANCIAL CRISIS: MEETING THE CHALLENGES AND OPPORTUNITIES
International Dialogue on the Financial Architecture
The international community has an important role to strengthen the international financial architecture to complement efforts at the national and regional levels to ensure a stable environment for growth and recovery. We noted the growing consensus on key aspects of a strengthened international financial architecture, and acknowledged the recommendations made on some of the key elements necessary to strengthen the international financial system, including those proposed by ASEAN. We urged that these recommendations are implemented on an urgent basis in order, inter alia, to reduce the risks associated with volatile capital flows. We welcomed the actions by the Group of Seven (G-7) and the IMF in a number of important areas.
In particular, we welcomed efforts to involve the industrialised, developing and emerging market economies, and the international financial institutions and regulatory bodies in the architecture process, in fora that include the G-22 meetings as well as its working groups and G-33 seminars, and in continuing fora such as APEC. This dialogue has contributed importantly to the process of strengthening the international financial architecture, and we called for the establishment of an ongoing mechanism for inclusive dialogue between industrial, developing, and emerging market economies to build consensus on major economic and financial policy issues in the future. We also welcomed the recent establishment of the Financial Stability Forum, and looked forward to its expansion to include key emerging markets and to the early completion of its work on highly leveraged institutions (HLIs), offshore centres, and short-term capital flows
Minimising the human costs as well as helping economies strengthen their social policy responses and institutions to deal with crisis should be an important element in discussions about international financial architecture. Due priority should be given to measures to protect the poor and most vulnerable segments of society. In this regard, we welcomed the World Bank’s work on principles and good practices in social policy. To support this effort, we urged strengthened collaboration between the IMF and the World Bank on public expenditure work that analyses the impact of fiscal choices.
While efforts to reform the international financial architecture will take time, there is need for the momentum to be maintained notwithstanding the recent return of stability to financial markets. We tasked our Deputies to prepare a report summarising developments in the areas identified by Leaders at their November 1998 meeting, including the work of the recently-established Financial Stability Forum on HLIs, offshore centres and short-term capital flows, and involving the private sector in crisis prevention and resolution. This report would be tabled at the Leaders’ meeting in Auckland this September.

Strengthening Financial Systems
Since 1994, efforts have been focussed on strengthening domestic financial systems. More recently, a survey was conducted to assess the adequacy of our supervisory regimes. We are encouraged by the progress achieved by member economies in complying with the Basle Core Principles for Effective Banking Supervision. A regular exchange of views and greater interaction among APEC bank supervisors is important aimed at reducing gaps in the implementation of measures. The first such meeting in Kuala Lumpur in December 1998 was held in conjunction with the annual meeting of the Directors of Supervision of the SEACEN Centre. Such collaborative meetings by bank supervisors from APEC and SEACEN economies are important in facilitating information sharing and should be continued.
Proposals to strengthen APEC supervisory regimes should not duplicate on-going efforts by other fora including the Basle Committee, EMEAP and other APEC working groups on corporate governance and disclosure. Efforts to strengthen financial supervision are important but they cannot be a panacea for crisis prevention, as these would need to be supported by measures to strengthen macroeconomic policies, increase corporate governance and improve disclosure. An updated report on the progress of APEC member economies towards strengthening supervisory systems will be tabled at our next meeting.
The capacities of our supervisory and regulatory authorities must be continually upgraded and we recorded our thanks to the ADB and the SEACEN Centre for their support in implementing the Action Plans for the Training of Bank Supervisors and Capital Market Regulators. We reaffirmed our commitment to human resource development in the regulatory supervisory area in support of work towards strengthening financial systems at the national and global level. Based on the findings of the survey, the APEC training initiative should include market risk and consolidated supervision issues. To assist economies in meeting fully the Basle Core Principles, the APEC training initiative would also consider setting up a programme where member economies relatively advanced in meeting the Core Principles could share their experience and practical knowledge with other interested member economies through organised seminars and courses. We welcomed the APEC Financiers Group’s (AFG) initiative to organise training and educational programmes for financiers and financial supervisors from the region. On the securities side, there is further scope to develop and co-ordinate portable or multi-jurisdictional programmes on international standards to help meet training needs that cannot be satisfied through domestic programmes.
Since the inception of our process, a number of voluntary principles and voluntary action plans have been approved and it would be useful to develop an approach to track the progress in implementing these plans and principles. We tasked our Deputies to develop such an approach, which as a first step should be a compendium of measures in adopting international standards/codes/best practices to strengthen their financial systems. To facilitate the Deputies’ work, we requested the IMF and World Bank, in consultation and co-operation with the relevant international organisations, to compile an initial matrix of such key standards.
The recent experience of a number of economies has underscored the importance of strengthening financial systems to meet the challenges of capital account liberalisation. A major emphasis should be placed on sound debt management practices and on avoiding policy biases that encouraged short-term over long-term capital. There is need for the IMF to work further in this area, including developing guiding principles for economies that are liberalising and opening their capital accounts, in line with the economies’ specific circumstances. Such guidelines should aim at managing the risks associated with sudden shifts in capital flows. Economies’ efforts in this regard would be strengthened by parallel progress on supervision, regulation and disclosure standards for private sector financial market participants.

Enhancing Transparency and Disclosure Standards
A more effective functioning of markets require that the application of standards of transparency and disclosure be applied by both the public and private sectors. Our own efforts in developing deep and liquid bond markets, strengthening corporate governance and encouraging greater accountability of credit rating agencies (CRAs) have underscored the importance of enhancing transparency and disclosure standards within our economies. With respect to our collaborative initiative on CRAs, we agreed to further work and tasked our Deputies to survey the codes of conduct and practices currently in use by various CRAs. Actions to strengthen information and disclosure standards in our respective economies have been identified. These should include efforts to foster a credit culture, promote alternative sources of information about credit risks and actively participate in international initiatives to harmonise accounting and disclosure standards.
We welcomed the IMF’s adoption of a comprehensive format for fuller disclosure of information on foreign reserves as part of the Special Data Dissemination Standards (SDDS) and its progress on elaborating codes of good practices. APEC members that have subscribed to the SDDS were urged to adopt the new format. All members were encouraged to adhere to the codes as soon as possible. We acknowledged the steps taken by the IMF to become more open and transparent and welcomed the progress being made by the World Bank and ADB toward higher standards of openness and transparency, including making public a wider range of operational documents.
We recognised the need for appropriate transparency by market participants, including HLIs and looked forward to reviewing the results of the Financial Stability Forum’s work, the report of the International Organisation of Securities Commissions’ (IOSCO) and reports of other private and public-sector bodies on issues relating to transparency and disclosure.

Enhancing the Roles of the International Financial Institutions
We noted the central roles of the IFIs in resolving crises. The establishment of the Financial Sector Liaison Committee by the IMF and the World Bank will facilitate effective collaboration in the provision of advice on financial sector issues. Further improvements in the co-ordination and collaboration among the IFIs in crisis resolution would strengthen the effectiveness of their response to crises. We looked forward to the IMF’s work on exploring ways to further improve its surveillance and programmes, and its modus operandi to better reflect the changes in the world economy, in particular the heightened role of international investors and the increased significance of large scale cross-border capital movements in contributing to external financial crisis. We welcomed the decision of the IMF to establish the new Contingent Credit Line (CCL) which should be readily available to all its members with good policies threatened by contagion, and thereby provide incentives to strengthen policies in a preventive manner. The ADB and the World Bank now have policies that allow them to provide credit enhancement facilities, which could help catalyse needed private international capital flows.

Involvement of the Private Sector in Crisis Containment and Management
The actions of the private sector creditors will always be critical in resolving a financial crisis. We reaffirmed our commitment to promote co-operation between economies; the private sector and the international financial institutions aimed at enhanced crisis prevention and resolution. All emerging market economies were encouraged to maintain appropriate communication with their private creditors. The wider use of market-based contingent financing mechanisms and collective action clauses in bond contracts was supported and we encouraged the industrial economies to take a lead role in this effort. Some constructive proposals have been discussed in a number of international fora. We also looked to the IMF to continue work in this area, to explore ways to introduce collective action clauses in sovereign bond issues and to further consider ways to assure more orderly debt workouts. There is need for further practical work for systematically engaging the private sector in crisis prevention and resolution.

OTHER MATTERS
We welcomed the opportunity to exchange views with the private sector and acknowledged the contribution of the AFG in achieving our common objectives. We welcomed the participation of key representatives of the APEC Business Advisory Council (ABAC) and the Pacific Economic Co-operation Council (PECC). We noted their recommendations, in regard to the education and training of regulators and participants of the financial sector and capital markets, the development of Asian bond markets, and the revitalisation of the financial system through institution building. We tasked our Deputies to work with the AFG, ABAC and the PECC to continue consideration of these recommendations with a view to incorporating them in our on-going work. We requested the AFG to examine and report at our next meeting drawing on the experience of recent crises, on the private sector’s role in crises, and on the various proposals that have been put forward for ensuring appropriate private sector involvement in the prevention and resolution of future crises. We looked to members of these groups to impress upon their colleagues in the private sector the reciprocal responsibilities and benefits of ensuring stable markets.
We welcomed the progress made by the Sub-Committee on Customs Procedures (SCCP) in its twelve-point Collective Action Plan and multi-year technical co-operation programme to facilitate trade in the region. We looked forward to smooth integration of the three new members into the action plan as well as the SCCP’s new initiatives including the customs aspects of E-Commerce, reaffirmed that trade facilitation and enforcement must be well co-ordinated and we encouraged the customs authorities to actively continue strengthening such initiatives and co-operation. We appreciated the SCCP’s contribution to the World Customs Organisation (WCO) in making efforts to modernise and harmonise customs procedures on a global basis.
We discussed the report presented by the Philippines on the outcome of the Second Joint APEC-OECD Symposium on International Business Taxation held in Cebu in November 1998 which discussed issues of electronic commerce and new technologies, harmful tax competition, the taxation of multinationals, and the tax policy and administration implications of financial instability. We called on our tax authorities, in co-ordination with the appropriate international and regional multilateral organisations such as the OECD and the ADB, to continue working on these issues.
39. We agreed to meet in Brunei Darussalam in September 2000

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