Roadblocks loom as ASEAN+3 forex plan plods ahead
Roadblocks loom as ASEAN+3 forex plan plods ahead
SINGAPORE (Reuters): Plans for an East Asian currency safety net to counter potential speculative attacks are gaining momentum as Tokyo pushes ahead with efforts to expand a Southeast Asian swap scheme.
But the disparate nature of the economies involved -- ranging from the still isolated Myanmar to the powerhouse of Japan -- makes a region-wide support pact look like a distant dream.
Though broadly seen as a positive step towards withstanding the sort of balance of payments crisis that racked Asia in 1997, analysts say the markets will have to be convinced about its efficacy.
"When you have sudden short-term net capital outflows, this gives you an additional avenue to stabilize markets," said Paul Alapat, regional economist at Nomura International in Hong Kong.
"But the whole issue's more about credibility: what exactly is the incentive for the stronger countries to commit huge reserves to the defense of weaker currencies, especially since the threat of contagion seems to be fading," he added.
There are also real concerns that countries like Indonesia and the Philippines, already seen as laggards on reform, will loosen their grip even further if they have a safety net.
Bolstering ASEAN
The proposed arrangement would build on an existing $1 billion currency swap scheme between the 10-member Association of Southeast Asian Nations (ASEAN), through bilateral pacts with Japan, China and South Korea.
The so-called ASEAN+3 group agreed on the sidelines of the International Monetary Fund/World Bank meetings in Prague to seek a basic framework for a regional currency safety net at a meeting in Singapore in late November.
ASEAN comprises Indonesia, Malaysia, Singapore, Brunei, the Philippines, Thailand, Cambodia, Vietnam, Laos and Myanmar.
Most analysts see the $1 billion pact, which allows any ASEAN member to borrow foreign reserves from its partners to absorb what it considers unjustified selling pressure on its currency, as mainly symbolic.
"It's not enough money to stop a severe attack on any currency. What it does show is some of the solidarity between the members of ASEAN, which is a positive," said Mansoor Mohi-uddin, regional currency strategist at UBS Warburg in Singapore.
The IMF has welcomed plans to expand the scheme, saying it will boost policy dialogue and cooperation in the region.
No amount has been set for the second set of swap arrangements because they have to be worked out bilaterally, but analysts say these are what will give the wider scheme its teeth.
"Magnitude would be critical but that should not be too much of a problem when you look at the size of FX reserves that are available," said Nomura's Alapat.
"It also matters what sort of bilateral swap lines the weaker countries are able to strike because they're the ones who really stand to benefit. The others have substantial reserves on their own," he added.
As of end-August, Japan's foreign reserves stood at $344.9 billion, China's at about $160 billion and Korea's at $91.4 billion. Singapore has the largest war chest within ASEAN, with preliminary data showing end-August reserves of $77.5 billion.
Finance officials are working on the framework, including rules for the duration of the swaps, interest rates, the collateral to be used and possible linkages with IMF programs.
But even once these are ironed out, transparency is likely to remain an issue, and that will hardly be helped by the ASEAN policy of non-interference in members' affairs.
"It is difficult to envisage Asian governments being forthright with regard to the appropriateness of other members' policies," said Bijan Aghevli, director of Asia-Pacific economic and policy research at Chase Manhattan Bank in Hong Kong.
There is also the ever-present fear of countries back-tracking on vital reforms, leaving their financial systems weak and exposed to a speculative onslaught.
While their floating exchange rate regimes put them at far less risk than before the crisis, even a multibillion dollar regionwide swap scheme can only go so far in fighting a massive speculative sell-off.
"A lot of the responsibility lies within borders. At most these swap lines are temporary lifelines," said Alapat.
"You can tide over temporary balance of payments problems, but it's no solution to currency stability without domestic restructuring."