Lower interest rates and closer economic integration in Asia-Pacific would allow the region to attract more capital, according to the Asian Development Bank (ADB).
"Global monetary easing could increase capital inflows into the region, bringing with it important macroeconomic and policy implications. The global monetary easing since mid-2024 can help strengthen capital inflows due to smaller policy rate differentials between the US and the euro area on the one hand, and Asian economies on the other," the Manila-based multilateral lender said in its Asian Economic Integration Report 2025 published on Monday, March 24.
But the ADB cautioned that while this creates more space for monetary policy easing across the region, economies must stay alert to the risks of potential fluctuations in capital flows and exchange rate volatility due to unforeseen economic shocks.
"It is vital to use regional cooperation to boost financial integration and maximize its benefits while minimizing costs due to vulnerabilities from any negative regional spillovers," the ADB said.
"Stronger regional cooperation can also harmonize disclosure standards and promote targeted financial instruments to help develop regional capital markets and promote sustainable finance when coping with the risks of climate change and environmental degradation," it added.
Amid the threat of looming US tariffs and trade restrictions, the ADB report highlighted the benefits of economic integration to robust regional growth during the last 20 years.
"ADB estimates indicate that the degree of Asia's trade integration is comparable to that of the European Union plus the United Kingdom (EU+UK). Regional integration in foreign direct investment (FDI) has also advanced significantly, although less than trade integration," it said.
"Migration, remittances, and tourism—or 'movement of people'—have remained steady. Financial integration has been the lowest, being lower than in trade, investment, and movement of people, and has lagged behind that of the EU+UK," the report added.
The ADB said that although Asia's expansion of preferential trade agreements (PTAs) highlights its commitment to regional integration, these agreements remain narrow and have had limited impact on trade diversification.
According to the ADB, while PTAs have intensified existing trade flows, particularly in primary sectors, they have not significantly broadened the range of traded goods, with low utilization rates often due to complex administrative requirements and strict rules of origin.