Author: C. Randall Henning, American University
Southeast Asian economies, like emerging markets and developing countries globally, are anticipating a rocky financial transition out of the COVID-19 pandemic. The rapid tightening of monetary policy in the United States and the economic fallout from Russia’s invasion of Ukraine are causing a global recession and threatening further capital outflows from emerging markets and developing countries.
ASEAN+3 (China, Japan and South Korea) countries can help protect Southeast Asian economies and advance regional institutions by tapping their precautionary facilities in conjunction with those of the International Monetary Fund (IMF). Before and during the COVID-19 pandemic, East Asian finance ministries and central banks quietly developed principal regional arrangements for mutual support in financial crises — the Chiang Mai Initiative Multilateralization (CMIM) and the ASEAN Macroeconomic Research Office (AMRO).
The AMRO has elaborated its surveillance and research program, but the CMIM has never once been tapped over its more-than-twenty-year history. The principal reasons for nonactivation lie in disagreement between creditors and debtors over the terms of assistance and an aversion within the region to borrowing from the IMF, to which CMIM activation has largely been linked. Southeast Asia’s experience with the IMF in the 1997–98 crisis has cast a long shadow.
If ASEAN+3 countries wish to create the regional equivalent of the IMF, an ‘Asian Monetary Fund’, they should do three things in the coming years. First, via quota or capital contributions, they will want to pool the reserves they have earmarked for the CMIM into a common fund and manage it jointly.
Second, they should enhance the disclosure of economic and financial information to the AMRO to enable it to analyse vulnerabilities in real-time and identify policy adjustments for countries stricken by crises.
Finally, they should merge the AMRO and CMIM into a single institution, enabling the former to better advise the ASEAN+3 finance ministers and central bank governments on the merits of CMIM activation and the conditions that might be attached. Whether ASEAN+3 will ever undertake these measures remains a decidedly uncertain and at best long-term prospect.
Even with arrangements as they currently stand, however, East Asian countries can take steps to protect themselves from financial instability while at the same time demonstrating the relevance of the CMIM and AMRO and charting the forward path for regional institutional development.
Individually or even jointly, Southeast Asian governments can request parallel qualification for the precautionary facilities of the CMIM and the IMF. The CMIM has the ‘Precautionary Line’ and the IMF has the ‘Flexible Credit Line’ (FCL) or ‘Precautionary and Liquidity Line’ (PLL). While some in the region hope to someday sever the link between the CMIM and the IMF, for the time being at least ASEAN+3 and the Fund would have to collaborate on any substantial activation.
Precautionary lines of credit are designed for countries with excellent or at least ‘sound’ policies that are not facing immediate crises but want insurance against a worsening of general financial conditions. Countries that qualify for them are given access to substantial amounts of funding but only borrow if they need the financing.
Members’ uptake on the IMF’s precautionary lines has been slow, but now eight countries have at some point been approved for them. While only Colombia has actually drawn, these lines have helped these countries avoid serious crises and reduce borrowing costs.
Because countries are approved for access to the precautionary lines as a contingency, their economic policies and institutional frameworks are reviewed in advance and there is either no conditionality (in the case of the FCL) or light conditionality (in the case of the PLL) during any drawing. Any conditions attached to these lines are a far cry from the IMF austerity during the 1997– 98 crisis and the conditions that attend regular, non-precautionary IMF programs elsewhere today.
The Philippines and Indonesia would likely benefit from such precautionary arrangements. These countries have elevated rates of borrowing but, given the credit ratings and interest spreads of the countries that have previously qualified, should qualify for the PLL and perhaps eventually the FCL.
Upon qualification at the IMF, ASEAN+3 should grant access to the CMIM’s precautionary line, increasing the total amount available and strengthening market confidence in the borrower. ASEAN+3 has aligned its qualification criteria with those applied by the IMF precisely to facilitate such joint access. Access would bolster the two countries’ defences against, for example, a liquidity squeeze on the financial sector or further depreciation of their currencies.
The ‘stigma’ of the IMF is the most common objection raised to jointly activating the linked portion of CMIM. Southeast Asian governments had legitimate grievances about the Fund’s programs in 1997–98, which continue to pose hurdles for finance ministers in organising external support. But experience with the IMF varies substantially from one region to the next. Even if justified at one point, the reputation of the institution deserves to be updated.
Rather than be constrained by an outmoded domestic understanding of the IMF, Southeast Asian officials should actively manage local discourse by explaining the benefits of access to multiple lines of low- or no-conditionality contingent financing.
Such engagement would not only broaden officials’ policy options but also prepare domestic discourse for ASEAN+3 lending at some point in the future, as such lending could well be subject to similar criticisms as those directed at the Fund. For the sake of Southeast Asian economies, it is time for the region to leave the 1997–98 crisis behind.
Randall Henning is Professor and Faculty Chair of International Economic Relations in the School of International Service, American University.