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The hiking of interest rates in the US poses risks to Emerging Asia's consumers and corporates, but the region's banks are generally sound and should be able to weather it, said Monetary Authority of Singapore (MAS) managing director Ravi Menon.
The overall growth in Emerging Asia will remain firm, at 6 per cent this year, and banks in the region will therefore not do badly, he said on Thursday.
Mr Menon was speaking at the 2015 Symposium on Asian Banking and Finance.
The symposium is one of three high level meetings, held in Singapore over three days and attended by central bank governors and heads of supervisory authorities from the Asia-Pacific.
But there are risks that banks need to watch, he said.
The divergence in monetary policy settings among the G3 economies could pose risks to financial stability that could also potentially hurt growth, he said.
"The anticipated normalisation of interest rates in the US against continuing quantitative easing in the eurozone and Japan will be reflected in sharp movements in exchange rates and bond yields," he said.
"This is not a prediction, it is already happening," said Mr Menon.
The scenario of a double whammy posed by a rise in US interest rates and a strong US dollar could expose vulnerabilities among some Asian borrowers, he said.
"Rising interest rates will increase the debt servicing burden of Asian households and corporates, especially those who have taken on high levels of debt at low rates.
"Asian corporates with large unhedged dollar borrowings could face increasing stress as a strengthening dollar undermines their ability to repay loans," he said.
Banks in Emerging Asia could face higher non-performing loans and they could also face reduced US dollar funding if there are large capital outflows from Asia, he said.
"But their liquidity and capital positions are generally sound and they should be able to weather this," he said.
The medium to long-term outlook for Asia remains sanguine, and rapid expansion of the middle class and regionalisation of Asian corporates will benefit banks.
"To be sure, as populations age and productivity growth slows, potential growth rates around the world are projected to moderate. But Asia is poised to remain the fastest growing and most dynamic region in the world," he said.
China and India will grow by 6-7 per cent on average over the next ten years. The Asean-4 - Indonesia, Malaysia, Thailand and the Philippines - are projected to grow by at least 4 per cent per annum on average. In addition to Singapore, the other Asean states are Brunei, Cambodia, Laos, Myanmar and Vietnam.
"It could be as high as 6 per cent if Asean becomes more integrated and these countries successfully implement structural reforms to raise productivity and competitiveness."
The Asian Development Bank projects that by 2030, the sum of the GDP of China, India and Asean in purchasing power parity terms could even exceed that of the US and Europe combined.
In Asean, the middle class is projected to make up two-thirds of the population by 2030, compared to less than a quarter in 2010.
Another force shaping Asia's banking landscape is technology, specifically digital technology, he said.
"This could prove both transformative and disruptive in a region where banking penetration remains low," said Mr Menon.
The broad adoption of financial technology or fintech could dramatically lower the cost of banking services, he said.
"Not only will this enhance financial inclusion, it could potentially also help mobilise untapped savings, enable more efficient financial transactions, and make credit more readily available and affordable to small businesses."