AMRO Deputy Director, Mr Yasuto Watanabe (first from left), attends the 3rd RFA held in Luxembourg from 16-17 May, and gives the closing remarks for the event.
Closing Remarks by Mr Yasuto Watanabe, Deputy Director of AMRO
at the 3rd Joint Regional Financing Arrangement (RFA) Research Seminar


16-17 May 2019
(As prepared for delivery)

Distinguished guests,

It is my honor to have the opportunity to reflect on what we have discussed in the past two days. We have covered a wide range of pertinent issues, including risk detection, focusing on some critical factors from the past European crises, risk transmitting mechanisms to emerging markets and sovereign default issues, as well as risk detection tools developed by the International Monetary Fund (IMF), the European Central Bank (ECB) and the ASEAN+3 Macroeconomic Office (AMRO). We also had a lively discussion on what Regional Financing Arrangements (RFAs) can do to prevent the next crisis.

My closing remarks will touch on where we stand in terms of development of the RFAs and how we can move forward in addressing possible future financial crises and securing financial stability regionally and globally.

Global economy: protectionism and capital flow volatility

The global economy is undergoing profound changes and facing increasing uncertainties that need to be carefully managed.

  • First, rising protectionism and unilateralism. AMRO’s assessment suggests that in an adverse scenario of an escalating US-China trade tension when the two sides would impose tariffs of 25 percent on all imports between the two countries, the regional growth of ASEAN+3 growth will be hit by 0.4 percentage point over 2019 to 2020.
  • Second, capital flow volatility and the risks of a sudden stop pose ever-present threats. Increased global interconnectedness suggests that external shocks tend to be amplified and transmitted quickly, with risks of broader spillovers. This is of particular concern to East Asian emerging markets as they have been receiving large amount of inflows of non-FDI capital accounting for 8 percent of GDP since the Global Financial Crisis (GFC).
  • Third, technological advancements are changing the traditional risk transmission channels. Risks from cyber-crime and cyber-attacks, for example, may weaken the integrity of the financial system, undermine confidence, and potentially hamper policy transmission to the real economy.
  • Lastly, climate change related risks which may pose more damage on the economies and the international financial system than ever.

Increasing role of RFAs

Given the threats and prolonged uncertainties in the global economy, enhancing the financial safety net, especially strengthening the role of RFAs, should be a priority. The size of the RFAs has increased significantly since the GFC and they are currently the second largest resource in the global financial safety net (GFSN), only after countries’ foreign reserves.

According to AMRO’s calculation, the overall volume of RFAs currently amounts to USD 1,553 billion, which is even larger than resources of the International Monetary Fund (IMF) at USD 1,357 billion. More significantly, the delayed discussion of the IMF quota increase would signify the policy shift to inward-looking direction by major economies.

The current trade war between the U.S. and China signals that the U.S. has withdrawn itself from the position as the guardian of the international trade system. It is likely that we will witness similar shifts in the U.S. policy on international finance, especially in terms of IMF funding and financing. If the leading countries are no longer willing to shoulder responsibility and assume leadership in tackling financial crises, other countries would have to rely more on self-help measures, including RFAs.

RFAs’ effectiveness and the level of coordination with other layers of the GFSN are still revealing room for improvement, and in some cases, untested.

The G20 Eminent Persons Group report released in 2018 conveys a similar message. The shortcomings of current RFAs identified by the report are two-fold:

  • The system as a whole lacks the necessary coordination, and
  • Several new RFAs, including the Chiang Mai Initiative Multilateralism (CMIM), have not been tested in an actual crisis.

CMIM experience

Policymakers in the ASEAN+3 region are fully aware of these challenges. Given the legacy of the so-called “IMF stigma” in the region, CMIM parties need to strike a balance between improving CMIM as an independent facility and at the same time, enhancing coordination with the IMF. During the past years, the members, with support from AMRO have worked intensively on these tasks. Let me briefly share our experience.

  • The members have recently concluded the first CMIM periodic review and one of its main objectives is to improve CMIM’s coordination with the IMF. For example, financing terms and conditions of CMIM-IMF linked portion were amended to ensure consistency with IMF programs. To enhance coordination with the IMF in terms of program and conditionality design, information-sharing procedure and conditionality framework were introduced. The review and monitoring procedure were also adjusted to be consistent with the IMF’s post-program process.
  • On top of this, discussions to enhance CMIM’s effectiveness as an independent facility is also in progress. The ASEAN+3 members are discussing several options for the future directions of CMIM. In terms of institutional framework, the members are discussing the merit of introducing paid-in capital instead of current funding structure based on swap transaction. They are also examining the feasibility of broadening the mandate of CMIM to cover new types of threats such as natural disasters and structural issues. In addition, the members have conducted a study on local currency usage in CMIM funding and support.

Enhancing communication and knowledge exchange among RFAs

Our peer RFAs are also making similar efforts. For example, the ESM is undergoing reforms that encompass extended surveillance, crisis management, and a broader scope of financing in times of need. FLAR is also enhancing its structure and capacity. The European Fund for Stabilization and Development (EFSD) is moving towards enhancing its institutional arrangement.

In the exercise of upgrading RFAs, I strongly believe that we can learn from each other’s experience. For instance, when designing CMIM’s coordination process with the IMF, we took the experience of IMF co-financing by the Eurozone’s RFAs as benchmarks. We also hope that the ongoing efforts to enhance CMIM can be an inspiration for other RFAs to look into when upgrading theirs.

In this regard, this joint RFAs seminar is a very useful platform for us to exchange experiences and learn from each other. It would also be beneficial to promote effective communication and knowledge sharing. In this regard, the idea of establishing a virtual-knowledge hub, in addition to the current joint secretariat function, which all RFAs can access and share their knowledge might be worth exploring.

To conclude, I would like to thank ESM colleagues for your warm hospitality and excellent arrangement of the event, especially for hosting the event in this beautiful castle, which was built in the 11th century and has since then survived several wars. We would like to follow the history of this castle to defend our own region from external risks and the next crisis.  Thank you all for your active participation. We look forward to seeing all of you at the 4th RFA Research Seminar next year.