By Feng Lu
The Chiang Mai Initiative Multilateralisation (CMIM) is a multilateral currency swap arrangement among ASEAN+3 members, which aims to provide financial support to its members facing balance of payments and/ or short-term liquidity difficulties. Each CMIM member is obliged to contribute a certain amount of resources in U.S. dollars to the arrangement, and in return, is entitled to swap its local currency with the U. S. dollar for an amount up to its contribution multiplied by its purchasing multiplier, when in need. To further improve this mechanism, it is necessary to study the feasibility of allowing local currency contributions to the CMIM arrangements.
A few key practical issues should be examined in developing a workable modality of local currency contribution to the CMIM arrangement.
Possible Sizes of Local Currency Contribution
Although a significant share of trade and the cross-border financial transactions within the regional is still in U.S. dollars, progress has been made in terms of local currency usage in the region. For example, for Thailand, the baht’s share in global/ regional financial assets and liabilities in 2017 stood at 11 percent and 17 percent respectively for residents. For Indonesia, meanwhile, the rupiah’s share in global and regional financial liabilities reached 20 percent and 5 percent in the same year. And in the case of Japan and Korea, over 90 percent and 70 percent of global financial liabilities were denominated in the yen and won respectively.
Given that the regional financing arrangement aims to provide liquidity support to members experiencing short-term liquidity and/ or balance of payments difficulties, the scale of regional currency settlements for trade and financial transactions may be useful in gauging the appropriate size of local currency contributions. For trade invoicing and settlement, it is estimated that the average share of local currency usage in the region may be around 10 to 20 percent; and in cross-border financial assets and liabilities, it could be an estimated 10 to 15 percent. These shares of local currency usage in the region could be considered as the lower range for the possible size of local currency contributions to CMIM.
A member’s intra-regional concentration for cross border economic activities may affect the size of local currency needed in a possible rescue operation when that member faces balance of payments difficulties. Members that have higher intra-regional concentration ratios may require a larger size of local currency resources. However, the potential role of intra-regional concentration ratios for different components of balance of payments may be different. Compared with foreign direct investment, in a crisis, the imperative to finance maturing debts and pay import bills may present more urgent challenges, and the intra-regional concentration ratios for portfolio investment and trade could have bigger weights in gauging the potential LCY demand from borrowers. Taking into consideration different components of balance of payments, the relative size of local currency contributions to the CMIM may fall in the range of 10 to 30 percent of the CMIM rescue package.
Eligibility of Currencies
There could be two scenarios when it comes to the eligibility of currencies for contribution to the CMIM. The first scenario is one of universal eligibility, which allow all members’ currencies to be used for the purpose of local currency contribution to the CMIM. Which local currency and the amount may be determined by the specific demands arising from a possible crisis that triggers a rescue operation. It is envisaged that some members’ currencies are unlikely to be drawn due to understandable factors such as the relatively small size of the economy of currency issue, a limited chance of the currency being used in international transactions, and so on. In practice, the likelihood of adopting the universal eligibility scenario is likely slim.
The second scenario is that of partial eligibility, which allows only selected currencies to be used for local currency contribution to the CMIM. A set of criteria, which comprises of the relative sizes of GDP, foreign trade, foreign financial transactions and foreign exchange reserves, should be adopted to select the currencies. Taking these criteria into consideration, only the RMB and the yen could potentially be used as local currencies for contribution to the CMIM in a narrow coverage case. A wider coverage case could include the Singapore dollar, Indonesia rupiah and Korean won, and further adopt the use of the Malaysia ringgit, Thai baht and Philippine peso.
“Voluntary” versus “Mandatory”
When it comes to the modes of local currency contributions, whether contributions should be “voluntary” or “mandatory” must be considered. The voluntary approach implies that local currency contributions should be based on bilateral consultations between the borrower and the lender, and therefore, may be implemented in a more flexible manner. In comparison, the mandatory approach implies that the rule will be applied systematically if local currency contribution is accepted. Given that local currency contributions are pre-conditioned upon the actual demand for a local currency from a borrower, local currency contributions to the CMIM should be voluntary in nature rather than mandatory.
Interest Rates and Exchange Rates
Finally, one other thing needs to be considered – it is necessary to define and use exchange rates and interest rates converting the currencies that are allowed to be contributed to CMIM. If the direct exchange rate between the lender and borrower currencies is not available, the market exchange rate for each member’s currency vis-à-vis the U.S. dollar might be adopted as the benchmark exchange rate. And with respect to interest rate arrangements, the interest rate that prevails in the lender’s domestic interbank market could be used for the bailout operation.