The Manila-based Asian Development Bank (ADB) is urging the Association of Southeast Asian Nations (ASEAN) to deepen regional financial connectivity, positioning stronger and more integrated capital markets as a critical buffer against external shocks like the war in the Middle East.

In a speech before ASEAN central bank governors on Wednesday, April 8, ADB president Masato Kanda warned that the war’s impact extends far beyond oil prices, triggering capital flow volatility, exchange rate swings, and rising production costs across the region.

“This demands action on three fronts: stabilizing macroeconomic conditions, protecting vulnerable households and affected sectors, and building greater energy security over the long term,” Kanda said.

He reiterated the ADB’s readiness to support developing member countries (DMCs) amid the crisis, recalling the lender’s swift response during the pandemic. “When crises hit, we must move quickly. During Covid-19, the ADB provided $7 billion to Southeast Asian economies in the first year alone. We stand ready to do the same today.”

Kanda emphasized that in times of crisis, well-developed and interconnected financial systems serve as an immediate line of defense. “In a volatile world, strong capital markets are not just a long-term goal. They are an immediate line of defense,” he said, noting that deeper markets can absorb shocks, reduce dependence on external financing, and channel savings into productive investments.

While ASEAN has made progress, Kanda pointed out that capital markets across the region remain uneven and fragmented. Despite local currency bond markets reaching about $2.6 trillion, cross-border investment flows remain limited.

“[A] small business in Cambodia still cannot access capital from a pension fund in Singapore. Or, a Philippine infrastructure project cannot readily tap Malaysian savings,” he noted.

To address these gaps, Kanda highlighted digital transformation as a key enabler. He said technologies such as fintech, artificial intelligence (AI), and distributed ledger systems can connect savings and investment opportunities across borders more efficiently, while tools like digital “know-your-customer” (KYC) systems and enhanced disclosure frameworks can boost investor confidence.

However, Kanda cautioned that greater connectivity also comes with risks, including the potential to amplify financial shocks, regulatory arbitrage, and cybersecurity threats. “These are not reasons for caution. They are reasons for coordination,” he said.

As such, Kanda called for closer regional cooperation through harmonized regulations, expanded use of regulatory sandboxes, and broader investment in digital infrastructure to ensure all economies benefit from integration.

Kanda also reaffirmed the ADB’s support for regional initiatives such as the ASEAN Capital Markets Forum (ACMF) and the ASEAN+3 Asian Bond Markets Initiative, as well as the full implementation of the ASEAN Digital Economy Framework Agreement (DEFA).

“Digital technology is the critical tool for getting there. It expands access, improves efficiency, manages risks, and keeps the region integrated rather than fragmented,” Kanda said.