FINANCE COOPERATION
Since 1999 the ASEAN economies have been recovering from the financial and currency crisis of 1997-98 and their growth has continued to widen and deepen in 2000. After its V-shaped economic recovery in 1999, ASEAN consolidated its gains with sustained growth in the first half of 2000. The region’s gross domestic product is expected to grow by some 4.9% for the whole year. Stronger growth may be attributed to the continued expansion of exports, a revival in consumer spending and a turnaround in investment. As private-led demand plays a greater role in supporting the economic recovery, government pump-priming is beginning to taper off. Progress in banking reforms has also brought down regional levels of non performing loans, and corporate restructuring is restoring national business groupings to good health.
ASEAN Responses to Crisis
In December 1997, at the very time the crisis was gaining intensity, ASEAN’s heads of government resolved-in their ASEAN Vision 2020 statement-to move closer towards regional cohesion and economic integration.
In financial and macroeconomic cooperation, the leaders pledged to create a stable, prosperous and competitive region by undertaking the following:
- Maintain regional macroeconomic and financial stability by promoting closer consultations on macroeconomic and financial policies.
- Promote liberalisation of the financial services sector and closer cooperation in money and capital market, tax, insurance and customs matters.
The following year, at their summit in Ha Noi, the leaders agreed on an action plan to carry out their vision. The Ha Noi Plan of Action is a set of measures and actions that ASEAN aims to take, in cooperation and solidarity, to respond to the challenges of globalisation. Over the short term, the plan is meant to spur the region’s economies to recover; and to protect the region’s poor from the effects of the crisis. Over the longer term, the plan is intended to preserve the environment, lay the foundations for solid and equitable development and get ASEAN’s work better known in the world.
Specifically the Ha Noi Plan of Action calls for the following:
- Maintain regional macroeconomic and financial stability;
- Strengthen financial systems;
- Promote liberalisation of financial services;
- Intensify cooperation on money, tax and insurance matters; and
- Develop ASEAN capital markets.
The plan goes on to spell out specific steps or reforms that are to be taken in each of these concerns.
ASEAN has been carrying out a Finance Work Programme which details approaches and steps to promote macroeconomic and financial stability and strengthen the financial systems of the member countries. It includes adopting sound international financial practices and standards, deepening capital markets and improving corporate governance.
Taking a lesson from the crisis, ASEAN intends to ensure that liberalisation of capital accounts is properly sequenced to allow the freer flow of capital while cushioning the impact of sudden shifts in capital flows.
ASEAN Surveillance Process
As one of their most important initiatives to promote financial stability and prevent a recurrence of crisis, ASEAN finance ministers agreed on a framework for closer consultations of economic policies-called the ASEAN Surveillance Process (ASP) at a special meeting on 4 October 1998.
This Surveillance Process has two major elements. The first is the monitoring of global as well as regional and national economic and financial developments. Monitoring serves at least two purposes: to keep track of the recovery process and to detect any sign of recurring vulnerability in the ASEAN economies. The outcome of the monitoring exercise is reported to the ASEAN finance ministers twice a year. The ASEAN Surveillance Report, as the report is formally called, highlights recent economic and financial trends and recommends policy measures for the ministers to discuss during their Peer Review.
The Peer Review, the second element of the ASP, provides the forum at which ASEAN finance ministers exchange views and information on developments in their domestic economies-including policy measures carried out and the progress of structural reforms. The Review provides an opportunity to consider jointly unilateral or collective action to counter potential threats to any member economy.
The ASEAN finance ministers have conducted four peer reviews since the process was started in March 1999. The discussions so far have focused on policy measures that contribute to the economic recovery and those that would sustain it. Among them are measures to stimulate domestic demand, maintain prudent fiscal management and expedite bank and corporate restructuring. After each Peer Review, the ministers issue a joint statement to make public its outcome, including the joint policy decisions arising from it. These statements are distributed immediately to the media, sometimes through a news conference called by the Ministers. The statements are also posted on the ASEAN Secretariat Web site (www.aseansec.org).
The institutional groupings involved in the ASEAN Surveillance Process are the ASEAN Finance Ministers’ Meeting and the ASEAN Finance and Central Bank Deputies’ Meeting. Their surveillance-related activities are coordinated and supported by the ASEAN Surveillance Coordinating Unit (ASCU) based at the ASEAN Secretariat in Jakarta.
The Asian Development Bank has provided a number of regional technical assistance packages carried out through its Regional Economic Monitoring Unit in support of the ASEAN Surveillance Process. The Bank provides for the training of ASEAN finance and central bank officials; the writing of independent economic reports, studies on specific issues and capacity building of ASCUs and national surveillance units in some countries.
Developing ASEAN Bond Markets
Recognising the importance of financing sources other than bank lending and exchange-rate risks facing the corporate sector, ASEAN has also embarked on an effort to develop local bond markets and put in place infrastructure that would enable a corporation or a government to raise funds in any bond market within the region.
In April 2000 a workshop on developing ASEAN bond markets and asset-backed securitisation was held in Singapore. A Working Committee on Capital Market Development, which was earlier formed, also discussed on the fringes of the workshop the formulation of an ASEAN framework to facilitate the development of bond markets, including the infrastructure that will enable cross-border issuance of debt and investment within ASEAN.
In other areas of financial cooperation, ASEAN has formed a working committee to negotiate financial sector liberalisation. It has also created another working committee, on tax and public finance.
ASEAN+3 Financial Cooperation
One of the most important developments in regional financial cooperation was the engagement of the Northeast Asian countries, China, Japan and the Republic of Korea. The ASEAN+3 (ASEAN member countries and China, Japan and the Republic of Korea) Finance and Central Bank Deputies met in March 2000. That initial meeting was followed by a meeting of the Finance Ministers of ASEAN, China, Japan and the Republic of Korea in Chiang Mai in May, to discuss further measures and plans to carry out the (ASEAN+3) Leaders’ Joint Statement on East Asia Cooperation, issued in Manila in November 1999.
At their meeting in Bandar Seri Begawan in March 2000, the ASEAN+3 Finance and Central Bank Deputies proposed a regional support mechanism that would include setting up a network of East Asian training and research institutes and establishing a regional financing arrangement to supplement existing international facilities. This is in addition to the plans to set up a system of monitoring capital flows and to strengthen the regional surveillance mechanism in East Asia. In this connection, ASEAN is conducting a study to explore the modalities and structures of such a financing arrangement, and a network of contact persons is being formed to coordinate surveillance activities in the region.
Several reasons explain the growing calls for setting up regional support mechanisms. First, regional support mechanisms can be useful in complementing national measures, because individual countries lack the resources and capacity to face a financial crisis. Second, there is a need to pay greater attention to the regional level, because of the regional concentration of financial and trade flows. Third, the contagion effects of financial troubles affect countries within the region more severely. Fourth, a regional mechanism could respond more quickly to a financial crisis in a particular country and contain its contagion.
The Chiang Mai Initiative
The ASEAN+3 finance ministers met in Chiang Mai in May 2000 to discuss a regional support mechanism that can promote further regional financial stability. They agreed to establish a regional financing arrangement called the “Chiang Mai Initiative.” It consists of two components: an expanded ASEAN Swap Arrangement and a network of bilateral swap arrangements among ASEAN countries, China, Japan and the Republic of Korea.
To help countries meet temporary liquidity problems, ASEAN agreed to expand the ASEAN Swap Arrangement (ASA)-originally set up by the five founding member countries of ASEAN to provide financial support to members with balance-of-payments difficulties-to enlarge it as well as to include all the ASEAN countries. The ASEAN central banks have agreed on the principles governing the expanded facility and aim to conclude the agreement before the ASEAN Summit in November 2000.
Besides the expanded ASA, a network of bilateral swap arrangements and repurchase agreements among ASEAN countries, China, Japan and the Republic of Korea is also being negotiated to provide temporary financing for members which may be in balance-of-payments difficulties. A working group of the ASEAN+3 finance and central bank deputies has been formed to finalise the basic framework and principles of the bilateral swap arrangements and repurchase agreements before the ASEAN+3 Summit in November 2000.
Reform of the International
Financial Architecture
Recognising that the international financial system did not deal adequately with the financial crisis, the ASEAN finance ministers adopted a 12-point common position on reforming the international financial architecture at the Special ASEAN Finance Ministers’ Meeting, held in Manila on 30 April 1999.
The common position calls for the following:
The global effort to resolve the current crisis must recognise the diverse circumstances and priorities of individual economies at different stages of development. Any proposed solution must, therefore, be sufficiently flexible to accommodate these differences.
Reform of the international financial architecture must involve all countries, because of the global nature of today’s financial markets.
ASEAN shall work actively at international and regional forums to ensure its interests and priorities are considered in any proposal to reform the international financial architecture.
Although the purpose of any international reform is to enhance efficiency and stability in financial markets and to promote global economic activity, such efforts must not lose sight of the overriding objective of improving living standards. Priority must, therefore, be given to meas-ures to protect the poorest and most vulnerable segments of society.
Measures to strengthen the global financial system should include a review of the roles of the international financial institutions as well as the international regulatory bodies to enhance their capacity to contain and resolve a crisis.
Appropriate mechanisms are needed to enhance the participation of the private sector in crisis management and resolution.
Standards of transparency and disclosure must be applied equally to the public and private sectors. In particular, large market participants, such as highly leveraged institutions, which have systemic significance, should be subject to regular and timely transparency and disclosure requirements.
The dissemination of necessary information would help investors make better decisions and not rely solely on the information of rating agencies. Given the important role that credit rating agencies play in the international financial markets, there should be greater transparency in the rating process.
There must be closer and more coordinated monitoring of short-term capital flows. In particular, there should be global agreement on the disclosure requirements for such flows and closer collaboration and information sharing among national and international regulators.
To complement the ASEAN Surveillance Process, ASEAN shall explore options to strengthen regional support activities.
An orderly and well-sequenced approach to capital account liberalisation in coordination with the degree of development of the domestic financial sector and supervisory regime should be supported.
Sound, consistent and credible macroeconomic policies are fundamental to the sustainability of any exchange-rate regime. No single exchange-rate regime is suitable for all countries, and countries have a right to choose their own exchange-rate regime based on their national objectives and priorities.
Common Currency
At their summit meeting in Ha Noi on 15-16 December 1998, the ASEAN leaders decided to look into the feasibility of setting up an ASEAN “currency and exchange-rate system.’’ Their goal was to keep the ASEAN currencies stable. Such a system would help prevent the currency volatility that contributed to the financial crisis. With stable currencies, the business climate would become more predictable and help businessmen and corporations in making investment decisions.
But there remain many obstacles to overcome. Regional and mutual suspicions lingering from history are one. Questions of sovereignty must be resolved. That the common-currency idea is being studied nevertheless shows ASEAN leaders are looking at emerging possibilities brought about by the progress of regional integration and impelled by the financial crisis.
Insurance
At their meeting in September 2000 the ASEAN Insurance Regulators agreed to set up an ASEAN Insurance Training and Research Institute to conduct research and training for both the private (insurance) sector and regulators in the region. The Institute will be based in Malaysia. The regulators also agreed to harmonise insurance laws and to adopt the Insurance Supervisory Principles developed by the International Association of Insurance Supervisors as a minimum set of best practices.
Protocol 5 of the ASEAN Scheme of Compulsory Motor Vehicle Insurance was also finalised at the ASEAN Insurance Regulators’ Meeting (AIRM) in September and should be ready for signing by the ASEAN finance ministers by April 2001. The Protocol is one of the nine protocols to carry out the ASEAN Framework Agreement on the Facilitation of Goods in Transit.
Outlook
Faced with the East Asian financial crisis in 1997, ASEAN economies were pragmatic enough to concentrate on strengthening their domestic corporate and industrial structures as well as their local financial systems. But they did not stop at domestic reforms. They also undertook initiatives with a regional dimension. Since the problem has a regional dimension, part of the solution must also be region wide.
Despite stronger-than-expected economic recovery during the past two years, ASEAN finance ministers showed prudent and guarded optimism at their Special Meeting in Prague in September 2000. At the conclusion of the meeting, they said: “Notwithstanding the strong economic recovery, we noted that average growth is still below precrisis levels. In our view, the region is capable of sustaining higher rates of growth provided we address the structural weaknesses in our banking and corporate sectors. This would help to revive investor confidence and attract a higher level of capital inflow, particularly foreign direct investment. We therefore re-iterate our commitment to make further progress in structural reforms in order to achieve a higher sustainable growth rate.”
In this spirit, ASEAN will continue to strengthen its cooperation on the ASEAN Surveillance Process as well as its efforts to develop a strong and robust financial system. It will also make greater efforts to facilitate the continuing structural reforms, particularly debt and corporate restructuring in the crisis-affected countries.
East Asian financial cooperation will intensify within the ASEAN+3 framework. The expanded ASEAN Swap Arrangement is to be carried out by the end of 2000 and some bilateral swap arrangements are to be put in place by 2001, even while additional modalities and mechanisms for regional financial cooperation are being explored. Together with an enhanced regional economic surveillance process and closer consultations among ASEAN and among ASEAN+3 finance ministers, these measures should bring about greater financial stability and restore investor confidence in the region.
