ASEAN seeks alarm system to preempt crises
ASEAN seeks alarm system to preempt crises
BANGKOK (Dow Jones): Southeast Asian countries, stung by their biggest economic crisis in decades, are developing an alarm system that they say could allow them to defuse future crises before they erupt.
The system would depend on 'a checklist of triggers of financial and economic crises,' according to a copy of draft proposal obtained by Dow Jones.
The triggers would include "currency overvaluation, lending booms, (and) increases in short-term foreign-currency-denominated borrowing," the proposal says.
The proposal, presented to Southeast Asian finance ministers at a meeting in Jakarta last month, asserts that the economic crisis is the result partly of 'poor banking supervision and lack of transparency' in the financial system. The ministers approved the proposal in principle and asked the Asian Development Bank to develop the ASEAN alarm system.
"Current surveillance mechanisms do not adequately cover structural factors in the real and financial sectors, the root of the East Asian crisis," the proposal says. "A regional economic monitoring mechanism that is close to the source of the crisis can provide a quicker diagnosis and response."
The Asian economic crisis began last July when Thailand abandoned its fixed exchange-rate system after nearly draining its foreign reserves in a futile defense of the currency. It spread rapidly to other Asian countries that foreign investors thought resembled Thailand in their financial flaws, and the contagion eventually rocked financial markets worldwide.
The crisis left three countries -- Thailand, South Korea and Indonesia -- in recession, and has resulted in lower growth in most other Asian countries. The International Monetary Fund has organized bailouts totaling more than $100 billion for the three countries in recession.
Economists say the devaluation of the Thai baht exposed a banking system on the verge of collapse: most Thai financial institutions had borrowed heavily in foreign currencies to lend to domestic customers, and they had hedged little of their borrowings. Rather than imposing new regulations to require hedging by financial institutions, the Thai central bank provided more than 700 billion baht (THB) to keep them afloat. ($1=40.102)
As the crisis began, some Southeast Asian countries blamed foreign currency speculators for it. Malaysian Prime Minister Mahathir Mohamad said the withdrawal of funds by foreign investors had set his country back by 10 years. But increasingly, Asian leaders are acknowledging the blame lay with regional governments.
"The leaders were too preoccupied to notice, let alone correct, structural imbalances in their financial sector, even after their private sectors had incurred large external debts and current-account deficits were gaping," Singapore's Senior Minister Lee Kuan Yew wrote in a recent article in the Los Angeles Times.
The ASEAN proposal says such mistakes can be avoided if the group adopts practices similar to those of the Group of Seven (G- 7) leading industrial countries and ECOFIN, an organization of European Union finance ministers. Leaders of those groups hold regular meetings in which they coordinate 'cooperation on economic-policy issues,' the proposal says.
Finally, the proposal says, the database would help assess whether capital markets provide adequate incentives to foreign investors by identifying dysfunctional characteristics such as operating inefficiencies, poor infrastructure, high transaction costs, and reduced transparency.
The database would initially be housed in the Asian Development Bank in Manila, Southeast Asian ministers decided in Jakarta last month. It will also be financed by the ADB while cost-sharing arrangements among ASEAN member countries are worked out.
Five ASEAN countries -- Indonesia, Malaysia, Thailand, the Philippines and Singapore -- already take part in an IMF initiative introduced after the Mexican crisis of 1994-1995, whereby they disclose economic data, and information on the release times and calculation methods for the data, on an electronic bulletin board created by the IMF. Some of the countries, however, have yet to start making contributions to the bulletin board.