Speech by AMRO Director Mr. Toshinori Doi

Virtual Conference Co-hosted by the International Monetary Fund and the University of Tokyo

November 24, 2020

(As prepared for delivery)

1        First of all, on behalf of the ASEAN+3 Macroeconomic Research Office, I would like to thank the organizers for inviting us to this very timely event. ASEAN+3 Macroeconomic Research Office, or AMRO in short, is an international organization conducting economic surveillance of ASEAN+3 countries, and providing operational support to the CMIM or Chiang Mai Initiative Multilateralisation, which is the region’s financial safety net. The ASEAN+3 countries are, as you know, the ten ASEAN countries together with Japan, China, and Korea. Today, I would like to focus my remarks on the issues facing the ASEAN+3 countries.

2        It has been almost a year since the outbreak of the coronavirus. Although our region has also been hit hard by the pandemic, it remains relatively contained vis-à-vis the rest of the world. While the region accounts for around 30% of the global population, it only accounts for around 2% of the coronavirus cases.

3        However, in terms of economic impact, this region has been hit equally hard. With the exception of China, all countries experienced a sharp decline in economic growth in the second quarter this year, caused by various stringent lock-down measures. AMRO estimates a contraction of 0.3% for the region in 2020, with nine of our 14 members expected to post negative growth, which is quite unprecedented.

4        To cope with this extraordinary situation, our members adopted extraordinary policy measures, providing extensive fiscal and monetary policy support. The size of the stimulus packages ranges from 10% to 40% of GDP. In order to fund the fiscal packages, some governments have temporarily lifted the statutory ceiling of government debt.

5        A number of central banks have started to actively purchase government bonds in the secondary market, and in some cases even in the primary market. It is worth noting that the ASEAN countries are not facing the zero lower bound on their policy rates. Therefore, their bond purchase is not the same as the quantitative easing adopted by many central banks of advanced economies. Instead, these central banks are playing the role of “market maker of last resort” so that they can maintain the stability of the financial market, even under a large increase of new bond issuance from the government on one hand, and withdrawal of foreign capital on the other.

6        In some extreme cases, the government and the central bank went into a “burden-sharing arrangement”. Bank Indonesia has partly funded the stimulus packages by purchasing government bonds in the primary market. It also shared some of the interest burden with the government. All these bold measures were done under prudent principles together with clear communication, and they have been well received by the market so far.

7        With these extraordinary measures, it is clear that the governments in the region are pushing the limit of their macroeconomic policymaking, and stepping outside of their traditional comfort zone.

8        Now, let us see how these recent developments have impacted the financial stability in the region, and also how we as a region responded to the increase in risks and vulnerabilities.

9        ASEAN+3 is known for its active regional financial cooperation. The CMIM with a total firepower of 240 billion USD is the second-largest RFA only after ESM, the European Stability Mechanism. The CMIM together with AMRO is probably the only RFA with a full-fledged surveillance capability. And all these started from the Asian Financial Crisis.

10        The Asian Financial Crisis profoundly changed the way the governments conduct their macroeconomic policies. They have found out the hard way that the building up of buffers and reserves are critically important in protecting themselves from external shocks. So, in addition to allowing their exchange rates adjust more freely, they worked hard to achieve current account surplus and build up their foreign exchange reserves and engaged in prudent fiscal and monetary policies.

11        The member countries also started using the capital flow management measures and macroprudential policy measures, catering to their country-specific circumstances, to cope with the volatile cross-border capital flows. Given the recent events of a sudden change in global capital flows, such as the Bernanke-shock, our members have become quite sophisticated in using these instruments which were quite effective in maintaining stability.

12        On top of all these, the members have the CMIM as a regional insurance policy, providing them with some additional cushion.

13        So, the countries in the region were relatively in good shape going into the pandemic, with ample foreign reserves and adequate fiscal and monetary policy space. Despite the massive capital outflow during the February to March period, no country experienced any acute foreign exchange liquidity issue, and we continue to believe that a financial crisis in the region remains a tail risk, with very limited likelihood.

14        But, that has not held us back from enhancing the effectiveness and the operational readiness of the CMIM. In September, the members reached a milestone agreement, allowing members to access up to 40% of the CMIM without IMF co-financing, and the option to use their own currencies. We have also been working closely with the IMF. We amended the CMIM agreement and agreed on an operational framework with the IMF to ensure smooth co-financing when needed.

15        Looking ahead, the biggest challenge facing policymakers in the region today is to balance the trade-off between restoring growth, while safeguarding financial stability and rebuilding policy space.

16        Any eventual withdrawal of stimulus and forbearance measures must be measured and carefully executed. A premature exit carries the threat of potential cliff effects, while overly generous, extended support could be detrimental to fiscal sustainability.

17        A strong commitment to rebuilding policy space over the medium term is critical for maintaining policy credibility. The return to fiscal consolidation and the unwinding of extraordinary monetary measures in the aftermath of the pandemic will be crucial for regaining market confidence.

18        Now, let me conclude. While the COVID-19 pandemic has brought chaos and exposed weaknesses, it also brings opportunities. Catalyzing growth of the digital economy, strengthening the healthcare systems, just to name a few. While every country and region is different, the crisis reminds us to take stock, learn, and reset toward a stronger and more sustainable future.

19        Thank you.