In a quite prominent sign of the rising importance of Asia, Hong Kong topped the World Economic Forums (WEF) Financial Stability Index 2011, outdoing US and the UK for the first time. But given the financial crisis going on in Europe as well as in the US, and with many economic commentators touting the rising power of the emerging markets, the shock factor of this years ranking is not insanely bloated. While acknowledging the rising importance of emerging economies, the report also contains important pointers for these markets on how to design their macroeconomic policies to help inch them further up as far as financial stability is concerned. "There is considerable hope riding on emerging economies ability to provide growth until advanced economies are back on the recovery track. However, many emerging nations are still partially dependent on the financial systems of advanced economies," says the WEF report. The WEF sees international capital flows as a critical challenge for emerging markets, as these lead to overheating pressures, exchange rate appreciation, and sharp acceleration of asset prices in domestic markets. In fact, if capital inflows are reversed, they can be quite distortionary for economies too. The foremost mantra for emerging economies to understand is that financial systems and markets are "fundamentally intertwined" with the economy and are not a separate sector per se. Similarly, given that these economies are expected to move from the manufacturing to the services sectors, financial inclusion should be critical for their financial systems to support the "new engines of growth". At the same time, sound regulatory frameworks, as well as discretion-influenced macroprudential policies should also mark the economic agendas of the emerging world, such as macroeconomic policies to limit capital inflows. Recognizing that "housing is often the single largest asset of households, while the associated mortgage is correspondingly the single largest liability", the report stresses important measures for this sector - such as adjustments to loan-to-value ratios and debt-to-income limits, and the absence of distortionary house prices. Coming down to a more local context, down a notch from 54th in 2010 to 55th out of 60 countries in 2011, Pakistan has made it to the top 5 as far as being least financially stable is concerned. Out of the seven pillars for assessing financial development in a country, Pakistans financial markets were ranked the highest - implying that this area is just a tad better than others. But the devils in the details; foreign exchange and derivatives markets were marked "N/A" in this category. And guess which pillars were Pakistans Achilles heels? Institutional environment and financial access. A further breakdown showed that among the worst areas in Pakistan were tax collection, registering property, M&A activity, and non-life insurance density. Overall, while the emerging markets have a lot to learn from WEFs new report, a lot also shows Pakistan has a lot of catching up to do. Financial Development Index 2011 The top 10, Pakistan, and her peers (out of 60)
======================================= Country 2011 rank 2010 rank ======================================= Hong Kong 1 4 United States 2 1 United Kingdom 3 2 Singapore 4 3 Australia 5 5 Canada 6 6 Netherlands 7 7 Japan 8 9 Switzerland 9 8 Norway 10 15 India 36 37 Pakistan 55 54 Bangladesh 56 56 =======================================
Source: WEF Financial Development Report 2011 Financial Development Index in detail - Pakistan
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Rank/60
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Institutional environment 57
Business environment 56
Financial stability 52
Banking financial services 49
Non-banking financial services 54
Financial markets 37
Financial access 57
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Source: WEF Financial Development Report 2011
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