Asia's monetary pact a `work in progress' - Brief Article

Business Asia, May 19, 2000 by Alan Wheatley

In approving plans for closer monetary ties, Asian governments are painting with bold strokes on a big canvas.

But the project remains abstract, with the final picture very much in the eyes of the beholder.

One thing is clear. For the foreseeable future, this month's endorsement by finance ministers from the 10 members of ASEAN plus China, Japan and Korea of an expanded web of central bank swap lines and repurchase agreements need hold no fear for financial markets.

Details were conspicuous by their absence and ministers admitted the idea, aimed at preventing a recurrence of the balance-of-payments crisis in 1997 that wreaked havoc on much of Asia, could take a long time to get off the drawing board.

Moreover, sceptics remained dubious whether, if push came to shove, countries would be prepared to risk billions of dollars of their taxpayers' money to come to the aid of somebody else's floundering currency.

But as a declaration of political intent -- and an expression of frustration with what Asia widely regards as the International Monetary Fund's inadequate response to the 1997 crisis -- the "Chiang Mai Initiative" could prove a significant stepping stone.

"It's very important, it's a reflection of the commitment of ASEAN to move forward," said Mustapha Mohamed, an adviser to Malaysia's finance ministry.

The pact also underscores the growing momentum behind the informal ASEAN 3 grouping as a forum for East Asian cooperation.

The "regional financing arrangement" to be studied by the Jakarta-based secretariat of ASEAN on behalf of ASEAN 3 builds on an existing network of swaps among five ASEAN countries totalling a token US$200 million.

The aim is to build up the network steadily to convince financial markets that any participating country would have enough financial firepower to survive a currency run.

That would be in sharp contrast to the 1997 crisis when central banks could not muster enough liquidity to pay off foreign creditors who suddenly withdrew their capital, resulting in a cascade of currency devaluations and sharply rising interest rates that ushered in the deepest recession in half a century.

As an initial step, the five-country ASEAN swap web will be extended to Brunei -- and perhaps beefed up as much as 10-fold, a minister suggested -- while Japan, which already has a swap line with Malaysia, sets up similar facilities with Brunei, the Philippines, Thailand, Singapore and Indonesia.

"It is something which will evolve naturally over time," Japanese Finance Minister Kiichi Miyazawa said.

Tokyo, which is keen to extend its influence in Asia despite misgivings from historical adversaries, is a driving force behind the plan.

Academics have suggested the swap web would need to total US$50 billion to US$100 billion to stand any chance of making an impact, but ministers said they had not set a target sum.

"It's got to be big, but we don't know how big," Mohamed said.

Another black hole in the Chiang Mai Initiative is the operational framework participating countries will employ to decide whether their currencies are trading in line with fundamentals, whether corrective policy measures need to be taken and whether a country should be entitled to draw on the proposed regional financing arrangement.

As Europe's decades-long slog to a single currency showed, the collective management of currencies is hugely difficult even when there is a fierce political will to succeed.

Still wounded by accusations that Tokyo's plan for a regional monetary fund would have undermined the IMF, an official said ASEAN 3 could also incorporate the economic monitoring already undertaken by the Washington-based agency.

"This is not an effort to substitute for the IMF," the official said. "We'd be very unhappy if somebody characterised this as a relaunch of the AMF (Asian Monetary Fund). That was stillborn, and the time is right neither strategically nor tactically to resurrect it."

Others, though, hope the Chiang Mai Initiative will evolve one day into a fully fledged institution that would enable Asia to look after itself free from the perceived Western-slanted dictates of the IMF.

-- Reuters