Amid increased global uncertainty, efforts have been intensified to further promote macroeconomic and financial stability in ASEAN, including strengthening regional financial surveillance. During the second and third quarters of 2002 growth picked up as a result of recovery in global trade and commodity prices, and rebound in high-tech industries (except for western Europe). However, as geopolitical tensions intensified and as problems of corporate governance and profitability in the United States resurfaced, global growth started to decelerate in the last quarter.
Despite the still fragile recovery of world output growth, ASEAN economies are estimated to have grown by 4.4 percent in 2002 from 3.0 percent growth a year before. Revival in domestic demand, particularly private consumption and investment in some major ASEAN economies, underpinned the recovery. Fiscal and monetary policies remained accommodative while corporate and financial restructuring and financial liberalization in the region continued to gather pace. In the area of East Asian finance cooperation, key initiatives have remained focused on capital flows monitoring, provision of greater liquidity support and bond market development.
ASEAN Surveillance Process
The ASEAN Secretariat has prepared the eighth ASEAN Surveillance Report, in support of the ASEAN Surveillance Process (ASP), highlighting macroeconomic and financial developments in ASEAN economies in 2002 as well as outlook and policy issues for 2003.
In 2002, ASEAN, in an effort to enhance its resiliency against global demand shock, promoted domestic demand, particularly private consumption and investment through various measures including providing tax incentives and easier access to financing, and diversifying its export markets towards other countries in the Asian region including China.
Concerted efforts and measures have been made to contain the spread of Severe Acute Respiratory Syndrome (SARS) and mitigate its impact on the regional economies, particularly in the aviation, retail and tourism industries. Meanwhile, recent efforts to diversify export markets, promote SME activities and advance financial and corporate restructuring are expected to continue along with joint efforts to promote good governance and adopt sound international standards and practices in disclosure, accounting and financial supervision and regulation.
To further enhance surveillance activities, a new training program for senior finance and central bank officials of ASEAN countries has been implemented by the Asian Development Bank (ADB) starting in 2003. Two country-specific studies on fiscal sustainability and corporate restructuring have also been approved for funding by ADB to improve policy analysis and formulation under the ASP.
ASEAN Financial Liberalization
Efforts to open up the region’s financial sector and capital account continued to gather momentum. A new modality which is based on a positive list approach has been considered by the Working Committee on ASEAN Financial Liberalization under the ASEAN Framework Agreement on Services, including an adoption of a combined unilateral and negotiated request/offer mechanism for the sub-sector(s) in the Inclusion List, in order to chart a roadmap towards free flow of financial services in 2020. Negotiations for the current round, that are expected to conclude by end-2004, have also been undertaken.
To ensure an orderly conduct of capital account liberalization, an initial framework was agreed upon by the Working Committee on ASEAN Capital Account Liberalization. The framework consisted of phasing in liberalization of capital flows in six stages towards a freer flow of capital in 2020, including voluntarily setting up an individual country liberalization program. In preparing the country program or schedule of commitments, preconditions and prudential measures will be identified for each of the six phases. As part of that preparation, a self-assessment of the current status of capital account regime in each country has also been conducted and is expected to be completed by end of 2003.
Meanwhile, efforts to integrate the region’s financial systems have been progressing well. The ASEAN Central Bank Forum completed the study on ASEAN Common Currency and Exchange Rate Mechanism. While the study indicated that ASEAN is not yet ready for a common currency due mainly to lack of macroeconomic convergence, it however affirmed that the immediate priority was for ASEAN to deepen economic integration through trade liberalization. On capital market development, a study on “Collaborative Initiative on Capital Market Research and Training for ASEAN Member Countries” was being conducted to explore ways to enhance collaboration among ASEAN agencies concerned on the issue. In the insurance sector, an ASEAN Insurance Training and Research Institute (AITRI) has been established. Harmonization of insurance regulations and statistics continued to make progress.
East Asian Finance Cooperation
An Asian Bond Market Initiative to develop regional bond markets is being explored. The Initiative calls for the deepening of local bond markets in ASEAN, China, Japan and Korea as well as promoting cross-border issuance and investment. As a starting point, two study groups have been established to specifically look at various issues related to the establishment of a regional bond market, including asset-backed securities, sovereign bond issuance, credit guarantees, credit rating and settlement systems.
Recognizing the significant impact of adverse shifts in capital flows on individual country’s economy, a prototype reporting and monitoring system was developed and installed (or incorporated into existing system) in seven participating countries (Brunei Darussalam, Cambodia, Lao PDR, Indonesia, the Philippines, Thailand and Viet Nam) under the Japan-ASEAN Financial Technical Assistance Fund (JAFTA). The project aims to enhance monitoring capacity of short-term capital flows in East Asia as well as to facilitate bilateral exchange of short-term capital flows data, which has been on-going, for some participating countries.
On the Chiang Mai Initiative (CMI), twelve bilateral swap arrangements (BSAs) have been successfully concluded to date with the most recent ones being with Korea-Philippines, China-Malaysia and Japan-Indonesia. This brought the total size of the network of the BSAs to US$31.5 billion. In view of the need to explore other appropriate mechanisms (in addition to CMI) to further strengthen regional self-help and support in East Asia, a study on “Regional Self-help and Support Mechanism: Beyond the CMI” was completed in March 2003 (with financial support from JAFTA).
Progress has also been made in the development of regional early warning system. With financial and technical support from the ADB, an EWS prototype has been developed and being implemented in selected countries.
