Asian officials meeting in Brunei this week will seek to buttress a fund designed to prevent the sort of financial crisis that rocked the region in the 1990s in case the tide of foreign money into their area should suddenly turn again.
Surging capital inflows—the result of loose monetary policy in industrialized nations and global investors’ hunt for yield—have revived memories of the asset bubbles that preceded the 1997 Asian crisis, spurring policy makers across the region to take pre-emptive steps. From Hong Kong to Singapore, governments across Asia have sought to curb mortgage lending and to cool housing markets. Indonesia has set limits on loans to buy vehicles, while Malaysia has restricted credit-card borrowing.
In Brunei, officials from the Association of Southeast Asian Nations, or Asean, and their partners will put the final touches on a crisis-prevention facility with quicker access to emergency aid. They also will finalize work to upgrade the status of Asean’s financial-monitoring body, paving the way to give it more clout and responsibility.
“In the advanced economies, they’re printing money like crazy. So a lot of that money has, and will continue to, come to emerging markets in the region,” said Chalongphob Sussangkarn, distinguished fellow at the Thailand Development Research Institute and a member of the advisory panel to the Asean+3 Macroeconomic Research Office, or Amro, the bloc’s fledgling surveillance unit.
“What we’ll really have to be prepared for is some shock that may reverse the flows” of capital, Mr. Chalongphob said. “There’s always a danger that something may happen that would trigger a big outflow.”
The pain of the previous ebb tide—which brought the Asian economic “miracle” of the 1990s to a crashing halt—is still fresh. Following that episode, Asian governments that accepted austerity plans in exchange for aid from the International Monetary Fund wanted an alternative in the event of a future crisis.
Meeting in northern Thailand in 2000, Asean’s 10 member states—Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam—and partners China, Japan and South Korea pledged to provide one another with funds in the event of market stress. These promises grew into a regionwide safety net known as the Chiang Mai Initiative Multilateralization, or CMIM, the amount of which last year was doubled to $240 billion.
However, in 2008, when the global financial crisis hit, none of these countries turned to the Chiang Mai fund. Those Asian countries that did seek financial backup, such as Indonesia and South Korea, instead sought bilateral liquidity arrangements with international partners.
The fact the CMIM has never been tested and the need for approval from multiple stakeholders act as deterrents to its use, analysts have said. The fund’s limited geographical range suggests that, in case of a crisis, many member states might need its help at the same time. In addition, to draw anything close to the amounts that were needed during the 1997 turmoil, countries accessing the fund still would be required to sign up to an IMF program.
“These are early days and [the CMIM] has come a long way, but the fundamental question I think is, ‘Is it workable at the moment?’,” said Jayant Menon, lead economist for trade and regional cooperation in the Asian Development Bank’s Office of Regional Economic Integration. “I’m afraid the answer to that is ‘No,’ and there’s no use pussyfooting around that reality.”
Policy makers are taking the criticism to heart. Asean+3 is increasing the proportion of funds that can be accessed without IMF involvement, making liquidity available for longer periods, boosting Amro’s workforce and developing an early-warning system to help Amro nip problems in the bud.
One prominent result of the 1997 crisis has been Asia’s rigor in building buffers against another shock: Asean members’ foreign-currency reserves rose to $737.7 billion in 2011, from $172.4 billion in 1996. Yet having a credible regional safety net would allow states to put more of their savings to work developing their economies, potentially boosting demand for Western goods.
“The levels of reserves which we’ve got in Asean, especially [in] Singapore, Malaysia and Thailand, are historically unprecedented, as well as being very costly and dangerous in an international commercial-policy sense,” said Hal Hill, professor of Southeast Asian economies at Australian National University. “But it’s going to require a lot more convincing, I think, before they’d start easing off on that.”
One problem with the CMIM, Mr. Hill said, is that its structure—with pledged cash kept in special accounts at national central banks, rather than a collective pool of funds with centralized decision makers—seems unwieldy.
“When you get a potential meltdown, hours and days count,” Mr. Hill said. “Until and unless Amro really has credibility and the mechanisms for quick disbursement of funds are very clear,” countries are likely to look to other sources to resolve liquidity problems, he said. Policy makers have said they are aware of the challenges.
Bambang Brodjonegoro, who leads the fiscal-policy office at Indonesia’s Finance Ministry, said Asean+3 is working to speed up the aid-approval process. Deputy finance ministers, who act as representatives for their countries, can hold conference calls and make decisions to disburse funds “within hours,” he said.
In the future, he said, membership might be extended to the Asean+6, which includes Australia, India and New Zealand, or Asean+8, which adds Russia and the U.S.
In addition, he said, CMIM and Amro could even merge into an IMF-type structure “a few years ahead.” That would allow decisions on grants to be delegated to an executive committee at Amro, rather than to individual member countries.
First published: The Wall Street Journal website on April 1, 2013