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."