South Korea’s central bank chief on Monday urged Asia-Pacific economies to reinforce their resilience against potential external risk factors amid a fluctuating global financial environment.

“We must enhance the general resilience of the regional economy so that drastic changes in capital flows stemming from external risks do not lead to systematic risks,” Bank of Korea Gov. Lee Ju-yeol said in a conference jointly held at Seoul’s Plaza Hotel by the BOK and the Bank for International Settlements.

Seoul’s monetary policymaker especially pointed out to the high ratio of foreign capital in local bond markets as a key reason of potential volatility.

“Since experiencing the Asian Financial Crisis in 1997, Asia Pacific states have exerted efforts in establishing a financial market which may back up the stable growth of their economy, and this has resulted in a visible expansion of local bond markets,” Lee said.

The invigoration of bond investment has largely diversified foreign capital inflow channels, which were conventionally dependent on short-term bank loans and stock investment, according to the BOK chief.

“But the development of the bond market in the Asia Pacific region has contributed to the progress of the financial market and the operation of policies, but has also caused burden (upon the local market),” he added.

“Should the bond investment amount turn into an outflow, possibilities are high that the volatility of the financial and foreign exchange markets may expand further.”

Citing the recent examples of financial volatility in emerging economies, Lee suggested three policy objectives for Asia-Pacific states -- the recovery of economic resilience, international cooperation for financial safety network, and efforts to strengthen the structure of the local bond market.

“Regional states have already shown their dedication for a financial safety network through the Chiang Mai Initiative Multilateralization, the Asian Bond Market Initiative, and the Asian Bond Fund,” Lee said.

“Adding on to such efforts, they will henceforth have to expand international cooperation not only within the Asian region but also with global financial organizations such as the International Monetary Fund and the BIS.”

The BOK governor has recently been elected to the BIS board of directors, becoming the first South Korean official to take a seat in the 18-member board since South Korea joined BIS in 1997. Lee is set to start his three-year term starting January next year.

By Bae Hyun-jung (tellme@heraldcorp.com)