The global macroeconomic landscape has grown increasingly complex since the Asean+3 group, which includes 10 members of the Association of Southeast Asian Nations plus China (including Hong Kong), Japan and South Korea, introduced the Chiang Mai Initiative Multilateralisation, the bloc’s multicurrency swap arrangement, eight years ago. Moreover, since the 1997-98 Asian financial crisis, the Asean+3 region has become much more integrated, both intraregionally and globally.
Asean+3 economies account for 27% of world GDP, higher than the US at 24% and the euro area at 16%, and represent almost 30% of global trade, also outpacing the US and euro area. In the financial sector, Asia’s intraregional share of total cross-border debt asset investments increased to almost 17% in 2015, while its share of the region’s cross-border bank claims rose to 22%.
This expansion of international trade and the intricacies of financial networks have increased the risks of volatile capital flows. Asian countries continue to accumulate foreign reserves as the main buffer against shocks; reserves have increased fivefold since the Asian financial crisis to around $5tn in 2017. Reserve accumulation, however, is a costly and often difficult process that threatens to divert resources from productive investment.
The CMIM mobilises the foreign reserves of Asean+3 countries to assist members that face temporary financing problems in their balance of payments. Such regional financial arrangements are an essential component of the global financial safety net. Other components include national foreign reserves, bilateral swap lines between central banks, and the International Monetary Fund.
Asean+3 members constantly look to strengthen the CMIM, including by updating operational guidelines and conducting tests with the IMF. Because of the threat of macroeconomic volatility, it is important for members to deepen regional financial co-operation and bolster the CMIM. The continued global economic recovery provides an opportunity to perform a comprehensive review and reform of the arrangement.
Over the past few years, the Asean+3 countries, supported by the Asean+3 Macroeconomic Research Office, and the IMF have strengthened their coordination on CMIM test runs and information sharing. The region may want to expand its collaboration beyond the IMF to include additional elements of the global safety net, such as other regional financial arrangements and bilateral swap agreements.
The CMIM, with its current size of $240bn, is at the centre of Asean’s regional safety net, complemented by a network of bilateral swap lines amounting to more than $160bn. Besides enhancing this safety net through the pooling of reserves in regional financial arrangements, bilateral swap agreements and the build-up of foreign reserves by individual economies, authorities should examine the use of local currencies for invoicing trade.
Trade in Asia relies heavily on the dollar, even though intraregional trade has grown substantially. Asian foreign exchange market transaction data from the Bank for International Settlements show that the dollar remains the dominant vehicle currency in the region, accounting for 87.6% of turnover in 2016.
It is much the same for trade transactions. Japanese firms, for instance, mainly use the dollar as their invoicing currency for Asian exports, with the share reaching more than 50% in 2015 and more than 70% for imports.
In Thailand, there are encouraging signs of a shift towards using the local currency for invoicing trade. The dollar is still the dominant invoicing currency for exports and imports by Thai firms, but the use of the baht is steadily increasing. The Thai currency’s share in exports to other Asean countries increased to 23% in 2017 from 5% in 2000, and its share in imports increased to 13% from 4%.
Increasing regional currency usage will mitigate exchange rate risks in relation to the dollar. It will also lower the volume of dollar reserves that countries must hold as a liquidity buffer for trade. Initially, however, the region must address the lack of infrastructure to support trade and settlement in local currencies.
Far-reaching financial crises are bound to occur in today’s highly interconnected global economy. For Asean+3 economies, strengthening regional co-operation is crucial to securing financial stability.
Junhong Chang is the Director at the Asean+3 Macroeconomic Research Office.