Ladies and gentlemen,
It is with much pleasure that I come to you this morning to participate in FOREX '98, with its focus on "Asia in the next decade".
I am going to resist the temptation to speculate about what might happen in Asia in the next decade. While forecasts by professional futurists and others are often spectacularly accurate, they are equally, often spectacularly wrong.
There are lots of examples - from the famous 1945 prediction by Thomas J. Watson, president of IBM, that there would be a world market for five computers... to the equally enthusiastic prediction by the mayor of a US city, when he first saw the Bell telephone, that "one day there will be one of these in every city"!
How should we prepare Australia for its role in the regional financial market in 2010?
First, we must ensure we are not sidelined by globalisation and progress. And we must ensure that the massive tidal surges of capital flows around the world do not leave us stranded on a sandbar.
We should also see ourselves as a thriving financial centre, serving as the gateway to the region for other western markets, and we should see ourselves, with our Asia Pacific location and our multi-cultural population, as a bridge between east and west.
If we are to serve as a thriving, prosperous global financial centre we must first of all have a stable, low inflation domestic economy with good sustainable growth. And that of course is the goal of any responsible government.
You are finance professionals. You are well aware of how far we have come toward that goal in the last few years. Part of that, as I'll outline ahead, has been through measures such as fiscal repair, corporate law reform and of course, a commitment to structural tax reform.
Along with these measures, the Government has taken a keen interest in the development and strengthening of financial markets since it came to office in March 1996. I am delighted to have the opportunity of being closely involved in these exciting initiatives since my appointment as Minister for Financial Services and Regulation in late last month.
In looking to the future, I want to share with you the Government's vision for the financial sector, including the rationale for its financial sector policies. Specifically:
- we want to participate in restoring financial stability to the region
- we want to further strengthen our domestic financial market, and
- we want to see Australia become a major financial centre for the region.
Let's look at these areas one by one.
Financial stability in the region
International financial markets are more volatile now more than ever and that volatility has had a dramatic impact on the economy and social fabric of some of the countries in our region.
In response, our Government has sought to take a leadership position through regional stewardship by helping to return sustainable growth and financial stability to our neighbours.
That's why we pledged US$3 billion in support of three regional IMF programs. That's why we increased our aid budgets for Thailand and Indonesia. And that's why we provided an extra $1.4 billion in export credit insurance for Australian companies trading with Korea and Indonesia.
The Prime Minister has strongly supported the need for urgent action to reform the international financial system as one of the steps necessary to restore regional stability. He identified three areas requiring immediate action and practical outcomes.
Firstly: we need better-targeted disclosure requirements, focusing on the gaps in current financial market information, and new measures for monitoring highly leveraged short-term financial flows, off-balance sheet commitments and derivatives.
Secondly: we need better ways to manage future crises and we must involve the private sector in crisis management. These measures might include standfast arrangements to prevent a destructive uniform exit of lenders; collective action clauses; and orderly workouts involving rollovers, reschedulings and debt-equity swaps.
Thirdly: the IMF must be in a position to provide speedy and substantial support to qualified countries caught in international contagion.
The Prime Minister has also established a Task Force to address improvements in the international financial system. The Task Force includes some of Australia's most senior banking and financial services figures, and has been commissioned to produce substantive and imaginative suggestions for Australia to champion in the international forums in which we have been working.
Australia has taken a strong stand in APEC to encourage regional economies and markets to stay open and transparent, allowing the free flow of goods, services and capital.
The Prime Minister recently announced at the APEC Leaders Meeting in Kuala Lumpur an Australian commitment of A$50 million over three years to build up the region's economic governance bodies. The goal is to put in place international best practice in areas such as fiscal transparency, banking supervision and securities regulation.
In Australia....
In Australia, the Government has been working to build a strong, competitive and efficient domestic financial market within a sustainable macro-economic framework.
This audience is well equipped to make its own assessment of how well we're doing, what signals we can read from the relative stability of Australia's financial markets in the face of this global financial crisis.
Of course the resilience of our financial markets reflects the strength of the domestic economy and the structure of industry regulation.
But it also reflects the fact that Australia's financial markets have already learned - from their experience in the early 1990s - the lesson others are learning from the current crisis.
So what can we do to ensure that the region is not condemned to repeat history?
There seems little doubt that countries that have plunged into economic and financial crisis did have structural weaknesses that created a susceptibility to crises, but which had been obscured by successive years of high economic growth.
We have noticed a sharp rise in yield spreads. This could be evidence of increased risk aversion by investors or a reassessment of the risk levels associated with various financial assets.
Looking forward, we should not only assist the crisis economies out of their malaise, but also help them take action to manage the impact of such crises in the future.
What sort of action? That is for their own governments to decide, as our Government has decided its priorities. However, we believe a strong, efficient, competitive domestic financial market needs three key characteristics:
Firstly, a sound economic and fiscal framework
Secondly, a practical and effective regulatory environment, and
Thirdly, an efficient and competitive tax system.
There is much that could be said about each of these areas, but not enough time for detail. Let's borrow a media technique and put them into precis form.
Under the heading of economic and fiscal framework, the Government has concentrated on
- establishing a credible, transparent and forward-looking policy framework
- keeping inflation low and public finances sound
- reducing the public sector's contribution to the current account deficit.
- returning the budget to underlying surplus in 1997-98
- maintaining those surpluses, while growth prospects remain sound, and
- halving the ratio of Commonwealth general government net debt to GDP from 20 per cent in 1995-96 to 10 per cent by 2000-01.
As a result of initiatives like these, the economy grew by 4.4 per cent in 1997-98 while many of the countries in our region were in recession. All this has stood us in good stead in maintaining confidence since the Asian crisis, and has recently been given strong endorsements from both the IMF and the OECD.
Of course Australia is not immune from events in the world economy. We expect that growth in 1998-99 will be slower than the very strong growth of last financial year.
But growth is still expected to be solid. Before the election the Treasury forecast GDP growth of 2 per cent in 1998-99. The OECD projects Australia's economic growth over the next two years to be well above the OECD average.
Among many endorsements of government policies by the IMF, our encouragement of greater competition in the financial sector received special attention: this was seen as 'pathbreaking', as putting Australia's prudential regime at the forefront of international practice.
The strength of domestic financial markets also reflects the soundness of the Government's fiscal policy settings. Achieving the fiscal targets and objectives we have set ourselves is critical to maintaining financial market confidence in the Australian economy in an uncertain international environment.
Now let us turn to the regulatory environment, and the reforms that we are undertaking.
Our commitment to putting in place a world-class financial market regulatory regime was part of our election platform in March 1996. We knew then that this is essential to ensure greater market efficiency and stability.
We are also making significant reforms to corporate and market regulation. These include initiatives like the Corporate Law Economic Reform Program, which the IMF and the OECD have acknowledged will benefit financial markets and the Australian economy generally.
Following wide consultation with business and investors, a Bill to implement reforms relating to accounting standards, fundraising, takeovers and directors' duties was introduced into the Parliament earlier this year and I expect to reintroduce it next week.
Finally, in our review of the health and wellbeing of the domestic financial market, let us look at tax reform.
There are only a handful of people in Australia arguing against structural tax reform. Unfortunately, they are in the Senate.
The Government's new system is part of our wider policy agenda for securing Australia's economic future. We want stronger growth, higher productivity, more jobs and rising living standards. And this will be good for financial markets.
You've probably heard, in passing, that the centrepiece of our tax reforms include the introduction of a Goods and Services Tax (GST)........ which will spread the tax burden across most goods and services used by Australians. It will be levied at a 10 per cent rate and will start in July 2000. But prices are expected to rise on average by just 1.9 per cent, as other, less visible taxes are abolished.
The Special Premiers' Conference of 13 November 1998 endorsed a set of principles that will transform Commonwealth-State financial relations. The Commonwealth will legislate to pass all of the GST revenue to the States and Territories, thereby giving them a stable source of future revenue.
The States and Territories, in turn, will repeal a range of inefficient taxes that impact significantly on the financial sector, including debits tax, Financial Institutions Duty and stamp duty on marketable securities.
Exports of financial services will, of course, be GST-free, in line with the treatment of other exports.
The GST will reduce by $4.5 billion the cost of producing goods and services for export by removing the hidden cost of the wholesale sales tax, financial institutions duty, debits tax and some stamp duties.
Industry consultation will continue on the better tax treatment of financial arrangements to replace the outdated provisions currently in the law. This includes discussions on business tax reform. While the Government has made a number of significant tax policy decisions in many areas, it decided the best approach for business taxation was to set up an independent Review.
John Ralph, AO is the chair of the Review, assisted by Bob Joss, CEO of Westpac and Rick Allert, chairman of Southcorp.
The Review of Business Taxation is looking at a range of issues related to the taxation of entities and the taxation of assets. Its reporting date is June 1999 to allow a reasonable time for consultation with groups representing small, medium and large businesses as well as farming businesses.
I urge the financial services sector not to be left behind by other industries across the economy, and treat the Ralph committee lightly. The financial services sector must put forward bold, visible and innovative proposals that can withstand the volatility of modern financial markets.
Our Government intends the new business tax legislation to take effect from 1 July 2000. To meet that target, draft exposure legislation, consistent with the Government's reform strategies, will be prepared at the same time.
The first discussion paper from the Review was issued on Monday 23 November. It discusses the objectives and principles for business taxation and proposes an approach to the reform of policy development, legislative design and administrative processes.
The Review has called for submissions on its proposals and will also be holding seminars in December. I urge you to consider the proposals carefully and to contribute to the debate, which is a necessary part of improving Australia's business tax system.
Australia as a major regional financial centre
And so we return to our opening vision of Australia as a major regional financial centre.
The Government has engineered a reform agenda that will place Australia at the forefront of world best practice in many areas, and we are keen to capitalise on the benefits that will flow from this to the domestic economy. These benefits include ensuring Australia's full participation in the increasing global trade in financial services.
Indeed, its our Government's ambition to create a major regional financial centre here, in Australia.
This is a very achievable goal. The October Morgan Stanley International Market Capitalisation Index puts the capitalisation of the Australian Stock Exchange ahead of Hong Kong and four times the size of the market capitalisation of Singapore. In addition, according to MSCI, Australia is the only market in the Pacific region - including Japan - to have a positive annual compound rate of return over the past five years.
I have already outlined some of the steps we are taking which would help the development of a major financial centre.
These initiatives build on existing incentives along with the comparative advantages that Australia has to offer - besides our climate and lifestyle - including political stability; a strong legal system; well-developed infrastructure; a highly skilled workforce; low inflation; an efficient public sector and a vigilant regulatory regime.
It was some of these factors which encouraged Citibank, American Express, State Street and many others to locate significant parts of their global operations in Australia. And to ensure this trend continues I will be working on an action agenda to ensure our financial centre ambitions are achieved.
This action agenda will not be developed in isolation. In our globally networked world, it is becoming more and more necessary that we pool our resources and work together in order to meet more demanding challenges.
In April this year the Government established the Regional Financial Centre Task Force, chaired by Les Hosking, the Chief Executive and Director of the Sydney Futures Exchange. The Task Force will advise the Government on policies to build on Australia's existing advantages, to ensure our full participation in the increasing global trade in financial services.
My appointment as Minister for Financial Services and Regulation will also ensure there are close links with industry and that industry has a voice in Government, so that we can work towards our shared goals.
Certainly the Government will continue in its efforts to achieve these goals.
We believe the fundamental groundwork has been done, or is significantly under way.
We are already helping to restore financial stability to the region.
We have initiated key reforms in providing a sound economic and fiscal framework; an effective regulatory environment; and an efficient tax system.
And with your support, we can achieve our ambition of establishing Australia as a major regional financial centre.
So having promised not to speculate about what will happen in Asia in the next decade, I'm about to do so. Because I'm prepared to speculate that we can build an exciting financial future in Australia in a whole lot less than ten years. And over the next few months we'll be getting on with it.