Financial chiefs of 13 Asian nations, including Japan, China and South Korea, have come a long way since the 1997 Asian financial crisis in establishing various policy frameworks on regional financial cooperation. Now their will to make these frameworks workable is to be tested.
While doubling the size of a regional multilateral currency swap arrangement to $240 billion and the introduction of a crisis-prevention function were among the fruits reaped by the chiefs who met on Thursday in Manila to solidify the cooperative frameworks, it remains unclear whether member states will actually use the frameworks.
The extent of the International Monetary Fund’s involvement in regional cooperation, the degree of vigilance involved in surveillance actions to detect warning signs of a crisis and the increase of liquidity in Asian bond markets are lingering issues to be addressed to make the frameworks viable.
“The beefing up of the Chiang Mai Initiative alone is still not enough” to safeguard the vulnerable region’s economy against external shocks, said Shunji Karikomi, senior economist of the Research Department Asia at the Mizuho Research Institute, in reference to the scheme that was made into a multilateral arrangement in March 2010 to replace the previous network of bilateral swap arrangements.
It was not the CMI but the US Federal Reserve’s dollar provision that eased South Korea’s short-term liquidity shortage fears in the wake of the 2008 financial crisis. The excessive holdings of foreign exchange reserves also suggest that the member states do not see the scheme as a dependable arrangement at this stage, Karikomi said.
It is hoped that “an international safety net, involving the IMF and Asia’s CMIM (Chiang Mai Initiative Multilateralisation) scheme, could reduce the need for countries to accumulate (foreign exchange) reserves,” said Masahiro Kawai, dean of the Asian Development Bank Institute.
One other obstacle that deters the member states from using the CMIM is the inclusion of the IMF’s surveillance, observers said. Although the financial chiefs of the 10-member Association of Southeast Asian Nations plus Japan, China and South Korea agreed to raise the CMIM’s portion delinked from the IMF to 30 percent in 2012, borrowers still need to follow an IMF programme or conditionality to receive the remaining 70 percent of the disbursement.
Countries such as Indonesia and Thailand are said to remain cautious of the IMF’s intervention due to their experiences in the wake of the Asian financial crisis in the late 1990s, when the Washington-based lender compelled them to adopt measures they felt were unnecessarily harsh.
“The CMIM should be completely delinked from the IMF,” said Kawai, dismissing arguments that the delinking of the CMIM from the IMF would lead to a lack of discipline and create a moral hazard among the members.
“The European Financial Stability Facility and the succeeding European Stability Mechanism are not linked with the IMF but still work closely with it,” Kawai said.
“The Japanese government may be reluctant to increase the portion because it is one of the main creditors, but there is a way to continue cooperating with the IMF while delinking the CMIM from it,” he said.
Others also said the surveillance and monitoring function entrusted to the Singapore-based Asean+3 Macroeconomic Research Office to allow early detection of risks and effective decision-making of the CMIM should be strengthened to make the CMIM scheme more reliable to use.
Karikomi expected that the establishment of an organ like AMRO will give authorities in the region an opportunity to exchange information and discuss issues together closely.
“It becomes problematic when a situation continues where unfavourable and inconvenient data do not come out in the open,” he said, stressing more the role of AMRO as a forum to check on each other’s economic situation than its task to submit surveillance reports and compile economic data.
“It’s hard to judge the economic risks in the countries just on economic reports,” Karikomi said, adding that the presence of the central bank governors for the first time in the Asean-plus-three financial leaders’ meeting this year is a step in the direction of exchanging information on each other’s economic health.
While significant steps were made in the meeting to develop the region’s bond markets, where Asia’s growing private sector can secure more stable supplies of long-term capital, the markets’ growth relies on whether the public sector will be interested in buying the bonds, observers also said.
“Many investors in the region are still not familiar with bonds as compared to equities. government bond markets are increasing in size but there is much more to be done concerning corporate bond markets,” said Ryota Sugishita, executive director of the Asian Business Development Department at the Daiwa Institute of Research.
Sugishita said that doing more to publicise bonds as an attractive investment target and nurturing the development of local institutional investors among the issues to be tackled after the basic frameworks have been put in place are.