Rebuilding ASEAN’s Financial Safety Net
Authors: Kim Song Tan, Singapore Management University and Manu Bhaskaran, Centennial Asia Advisors
Singapore and Indonesia signed a US $ 10 billion bilateral swap agreement (BSA) in October 2018, allowing the two countries to help each other through US dollar loans in the event of a financial crisis. This decision signals the willingness of ASEAN countries to play a larger and more direct role in strengthening the region’s financial stability, but much remains to be done.
The new BSA reflects increased unease among some ASEAN countries about existing financial cooperation arrangements in the region. The most important is the Chiang Mai Multilateralization Initiative (CMIM), a $ 240 billion swap agreement between ASEAN + 3 countries (ASEAN plus China, Japan and South Korea).
CMIM was established in 2010 as multilateralism was in full swing and a new international financial architecture was taking shape. The new order implied an increased sharing of responsibility for crisis management between regional organizations and global institutions.
In theory, CMIM offers a solid and credible vehicle for crisis prevention and resolution. It provides a larger pool of resources than the pre-existing trade agreements between ASEAN and China, Japan and South Korea, as well as the US $ 2 billion swap deal between the monetary authorities of ASEAN. By consolidating the BSA network within CMIM, decision-making in times of crisis is streamlined. By subjecting 70 percent of the emergency fund withdrawals to IMF approval, CMIM solves the moral hazard problem associated with a multilateral fund.
Yet, ASEAN members are increasingly concerned about the effectiveness of CMIM and whether it represents the right funding arrangement for ASEAN. Specifically, there are concerns that the interests of CMIM are not aligned with those of ASEAN.
As China, Japan and South Korea provide 80% of CMIM’s funding, they are the main decision makers and must approve any aid to ASEAN countries in crisis. In addition, ASEAN + 3 can only approve the first 30 percent of funds that a country in crisis needs. The remaining 70 percent is subject to the IMF’s approval process.
ASEAN countries have been uncomfortable with the decision-making structure of CMIM for some time. They are exposed to shocks separate from those affecting China, Japan and South Korea. These East Asian economies are not as sensitive to the political and economic vulnerabilities that ASEAN countries face, and their decisions may therefore not adequately meet the needs of the region. ASEAN needs a regional financial arrangement that is fully under its control.
Many ASEAN countries also find the role of the IMF program onerous, especially for short-term financing intended to increase liquidity (as opposed to long-term financing intended to correct fundamental economic imbalances). IMF aid is still heavily stigmatized because of its role during the Asian financial crisis, making it politically difficult for many ASEAN governments to seek IMF assistance.
This stigma poses a major risk because an ASEAN country facing a temporary balance of payments shock may not resort to significant liquidity support until it is too late, since the bulk of CMIM funds is linked to the IMF. The stigma effectively reduced CMIM to a largely non-operational role.
The past 10 years of volatile global capital flows demonstrate the shortcomings of CMIM. Although no ASEAN country entered into crisis during this period, several ASEAN countries needed emergency financial assistance during what is known as the taper tantrum in 2013. They did not use the CMIM for this purpose, although this assistance is an essential aspect of its mission. .
Instead, ASEAN countries resort to bilateral swap facilities with central banks in and outside Asia. As the Indonesia-Singapore BSA shows, they are also looking to other ASEAN countries for help. Such alternatives undermine the credibility and effectiveness of CMIM as the region’s main funding mechanism.
ASEAN should rebuild its own crisis management framework as an additional financial safety net. It could start with a reconstructed and significantly strengthened ASEAN Exchange Agreement (ASA), governed by representatives from ASEAN countries only. This would allow better control over the speed and outcome of the fund disbursement process. Policy dialogue and surveillance efforts supporting the SAA can build on the existing ASEAN economic consultation process and the surveillance work of the ASEAN + 3 Office of Macroeconomic Resources (AMRO).
The new ASA could be designed as a liquidity facility intended primarily to cope with liquidity shocks and be seen as complementary to the CMIM. In the event of a liquidity shock, the ASA would constitute the second line of defense after the country’s own reserves, the CMIM constituting the third line of defense. ASEAN assuming the responsibility for the initial funding in the event of a crisis would greatly facilitate the subsequent funding of the CMIM.
The current ASA fund of US $ 2 billion is insufficient. It should be at least $ 50 billion. It is neither unrealistic nor impractical. Compared to the period before the Asian financial crisis, when ASEAN countries had only US $ 164 billion in international reserves, they now have over US $ 900 billion.
ASEAN has made enormous strides in terms of growth and development and is now one of the most dynamic and dynamic regions in the world. Yet another financial crisis in the absence of a strong and credible crisis prevention and resolution mechanism could derail this progress, making a new SAA a high priority.
Kim Song Tan is Professor of Economics at Singapore Management University.
Manu Bhaskaran is CEO of Centennial Asia Advisors, a regional advisory group.