Asian finance leaders to debate beefing up market safeguards

INCHEON, South Korea  – Asian finance leaders on Tuesday will debate ways to beef up regional safeguards to better address emergency funding needs during pandemics and natural disasters, as global recession fears and volatile financial markets cloud the economic outlook.

The impact of U.S. interest rate hikes on the region’s capital flows may also be discussed when finance ministers and central bank chiefs of Asean+3 – which groups the Association of Southeast Asian Nations (Asean) plus Japan, China and South Korea – meet on Tuesday.

Japan, which co-chairs this year’s meeting of Asean+3 nations with Indonesia, hopes to discuss strengthening currency swap lines, Finance Minister Shunichi Suzuki told reporters on Friday.

Japan is keen to propose a facility that enhances usage of existing currency swap lines, and allows members to tap funds in times of emergencies such as pandemics and natural disasters, said three sources with direct knowledge of the matter.

The recent failures of two U.S. banks have heightened alarm among policymakers about vulnerabilities in the global banking system and potential market turbulence that could re-emerge from aggressive U.S. interest rate hikes.

In a meeting with his Chinese and Japanese counterparts held prior to the Asean+3 gathering, South Korean Finance Minister Choo Kyung-ho said cooperation among the three countries has become more important for Asia and the rest of the world, as the global economy stands at an “inflection point.”

After being hit by the Asian financial crisis in the late 1990s, the Asean+3 group created a network of currency swap lines called the Chiang Mai Initiative Multilateralization (CMIM) in 2000, and revamped it into a multilateral network in 2010, to help each other forestall or combat sharp capital outflows.

But the swap lines have never been used, including during the COVID-19 pandemic, giving rise to calls from within the group to make the system more easily accessible in the event of shock events.

While Asian policymakers stress their countries have sufficient foreign reserves and buffers to fend off another crisis, they may see scope to make enhancements to the existing arrangements to combat potential market upheaval, analysts say.

“The fact CMIM has never been tapped since being created shows countries find it hard to use,” said Toru Nishihama, chief emerging market economist at Dai-ichi Life Research Institute.

While it was important to make CMIM more flexible, countries should also ensure they have a strong surveillance scheme in place to avoid causing moral hazard, he added.

Developing Asia is expected to achieve strong economic growth of 4.8 percent in 2023, faster than 4.2 percent growth in 2022 thanks to China’s rebound, according to the Asia Development Bank’s (ADB) projections.

The Asean+3 finance leaders, including Suzuki and Bank of Japan (BOJ) Governor Kazuo Ueda, are meeting on the sidelines of the ADB’s annual meeting in Incheon in South Korea this week.