Introduction
1. Thank you, Professor Cheung. It is my honour to participate in this important conference and to join a panel of notable experts this morning to discuss the developments on financial cooperation in our region.
2. You have heard in the earlier sessions of this conference about the progress made in economic and trade integration, and in physical connectivity in our region. Some, however, are of the view that regional financial cooperation in Asia Pacific has not proceeded at the same pace, and that this sector might affect the pace and scope of further regional economic integration as a whole. While this concern needs a more comprehensive answer, today I would like to give you some assurance in one area. We have learned first-hand from the Asian financial crisis experience that a crisis can be very painful. It can disrupt economic development and greatly push back countries’ income levels. Crisis prevention is therefore crucial and a regional financial safety net is one important tool that would provide an additional cushion for countries.
3. In this regard, I would like to share with you developments in the ASEAN+3 in the Chiang Mai Initiative Multilateralisation (CMIM) and the role of the organisation that I represent, the ASEAN+3 Macroeconomic Research Office or AMRO. Before doing so, I would like to firstly discuss the situation that our emerging Asian economies are facing as it will help point out the growing importance of financial regional safety nets in the region.
Emerging Asia Situation and Risks
4. Emerging economies in Asia are expected to grow further in 2014 and 2015. However, unlike in the past 3-4 years, they will play a supporting role in contributing to global growth, and possibly pass the main driver’s seat to advanced economies. Besides, the balance of support from domestic and external demand in Emerging Asia would be different from the past few years. External demand from the economic recovery in advanced economies, particularly the US, would be crucial to help maintain the growth momentum. On the other hand, domestic demand would likely become less buoyant with less fiscal space, given the earlier significant stimulus spending. In addition, some countries might also face external market pressures, as market participants increasingly focus on their external conditions especially current account conditions. These countries may need to restrain domestic demand to avoid worsening external conditions and possibly disorderly capital outflows.
5. Although growth would continue to be quite satisfactory, we still need to be very mindful about some risks ahead.
6. First, given the tendency and the need to rely more on external demand, if growth in large economies such as the US, Europe and China moderates, this will become a significant risk to emerging markets or EMs going forward.
7. Second, in some countries, the previous policy mix during 2010-2012 in the form of low real interest rates and high credit growth had helped spur strong growth, but had also contributed to fast credit expansion, rising household debt and asset prices. The debt burden of over-stretched households and corporates, and the rollover risks for external borrowing, could rise sharply as financial conditions tighten with further global and domestic economic recovery.
8. Third, as US monetary policy normalizes, EMs will also face challenges from fluctuations in capital flows. While a high level of foreign reserves and flexible exchange rate management could provide a significant buffer in several countries, those with small foreign reserves covers and weak external conditions could still face sudden stops on capital flows.
Chiang Mai Initiative Multilateralisation (CMIM)
9. Now let me briefly introduce the CMIM if you are not yet familiar with it. The CMIM has been established in response to what we have experienced and learned from the Asian financial crisis and the recent global financial crisis, which showed us that financial crises can occur abruptly and be very destabilizing. Sufficient buffers and a crisis prevention mechanism are therefore needed to help avoid them or mitigate their impact. The CMIM is a multilateral currency swap arrangement among ASEAN+3 members that evolved from a series of bilateral swaps among members. An important point is that this is a single agreement. It became effective in March 2010 with an agreed size of US$120 billion.
10. The core objectives of the CMIM are to address balance of payments and short-term liquidity difficulties in the region, and to supplement existing international financial arrangements. CMIM members include Ministries of Finance and Central Banks of the ten ASEAN countries, China, Japan and South Korea plus the Hong Kong Monetary Authority.
11. Since the CMIM first came into effect in March 2010, the world has continued to experience volatility in capital flows, and Asia is not immune to this volatility. European experiences gave us a lot of lessons. ASEAN+3 members therefore agreed further to enhance the CMIM in two ways. First, members agreed in 2012 to double the size of this regional buffer, from US$120 billion to US$240 billion. Second, members recognized that even an economy with good fundamentals and sound macroeconomic management can face sudden difficulties. We call them innocent bystanders. Therefore members agreed to introduce a crisis prevention facility called the “CMIM Precautionary Line (CMIM-PL)”. These two enhancements to CMIM are in the process of formal authorization within each ASEAN+3 economy.
Role of ASEAN+3 Macroeconomic Research Office (AMRO)
12. Now let me turn to AMRO and our mandate.
13. AMRO is the regional macroeconomic surveillance unit of the CMIM of the ASEAN+3 members. Our objectives are to monitor and analyse regional economies and to contribute to early detection of risks, and to support swift implementation of remedial actions and effective decision-making of the CMIM.
14. We are based here in Singapore and began our operations in 2011, less than 3 years ago. To fulfill the challenging and important mandate given to AMRO, we have been growing our office. Currently, we have 26 staff, 15 of whom are economists from 11 economies who regularly conduct country surveillance.
15. Let me elaborate on AMRO’s status. While AMRO supports the co-chairs of the ASEAN+3 Finance process in CMIM matters, presently AMRO is not the secretariat of CMIM. Therefore, currently we are not in a position to officially explain the content of the CMIM agreement, nor to represent the views of CMIM members.
16. In this regard, in 2013, our stakeholders agreed to transform AMRO from a company to an international organization. This is a crucial transformation that is AMRO’s priority for this year. International organization status would provide a good foundation for AMRO to take on secretariat functions of the CMIM if directed by ASEAN+3 members, and to better support CMIM activities. We trust that this status will also enable AMRO to better represent and give a stronger regional voice in international fora.
Immediate Tasks for AMRO
17. As a new institution with a challenging mandate, there are immediate tasks that AMRO needs to accomplish amid a fast changing environment.
18. First, we are working hard to enhance the effectiveness of our surveillance activities, especially on financial sector stability and capital flows so that we would be able to detect the problems early on. With the introduction of the crisis prevention function to the CMIM, we are building relevant surveillance capacity in specific areas of macroeconomic policy management, including in Fiscal Policy, Monetary Policy, External Position and Financial Sector Soundness and Supervision.
19. Second, AMRO plans to enhance collaboration with other International Financial Institutions (IFIs) to improve our institutional capacity. So far we have established cooperation with IMF, ADB and OECD through capacity building and exchanges of views on macroeconomic developments. Efforts in the pipeline include joint research that would leverage on the expertise of different institutions, as well as further capacity building. Nevertheless, to ensure the integrity and independence of AMRO’s surveillance assessments, this will be undertaken in a step-by-step and measured way, under the guidance of our members.
20. We believe that these endeavours will raise AMRO’s capacity to effectively support the CMIM, and thereby make an important contribution to financial cooperation in our region. I 8 would like to end my discussion here, and I welcome your comments and questions.