By Junhong Chang, AMRO Director
AMRO’s October edition of the Monthly Update of the ASEAN+3 Regional Economic Outlook notes that while ASEAN+3 economies continue on a solid growth path, the region is increasingly being tested with a sharper trade-off between financial stability and growth objectives, particularly against the backdrop of escalating trade protectionism and tightening global financial conditions.
While maintaining unchanged baseline growth estimates for the region in 2018 at 5.4 percent, we shaved our forecast for the next year to 5.1 percent, consistent with assessments released by the International Monetary Fund (IMF) thereafter.
Strong economic fundamentals and strong buffers, coupled with a more flexible and responsive policy framework, have so far allowed East Asian economies to withstand shocks. However, given the changing global economic landscape, domestic effort alone will not suffice, and the region needs a collaborative effort.
The first area in which collaboration is needed is surveillance, which can provide early detection and warning to economies in preparation for any possible crisis. If economies aren’t well prepared, even seemingly minor crises can grow in breadth and assume global scale.
The G20 Eminent Persons Group recently emphasized the importance of an internationally agreed framework for assessing and mitigating excess volatility in capital flows and exchange rates, as well as that of a more integrated financial surveillance and institutionalized early warning exercise. This is particularly relevant to East Asia given the regional spillovers from the recent episodes of global financial market turbulence.
In light of these developments, AMRO is developing a high-frequency Financial Stress Index (FSI) to monitor market volatility in the region. We plan to use the FSI as one of the surveillance tools to assess signs of financial stress in the region, and then make timely recommendations about possible pre-emptive policy measures.
The development of the FSI is summarized in our thematic study on Assessing Financial Stress in China, Japan, Korea and ASEAN-5 Economies published in October. A number of indicators that proxy different areas of stress in the financial sector – including the stock market, sovereign and corporate debt market, money and interbank market, and the foreign exchange market – are evaluated in the study. The results suggest that in each economy included in the study, the FSI is able to identify stress originating from global, regional and domestic events.
Regional Financial Safety Net
Collaborative effort is also needed to step up the regional financial safety net (RFSN) that provides protection against potential shocks. RFSN-related developments in East Asia have been remarkable – the region’s economies have been actively strengthening their buffers in light of increasing volatility and spillover risks. For instance, just a few weeks ago, a new Bilateral Swap Arrangement (BSA) was signed between China and Japan, and another one agreed in principle between Bank Indonesia and the Monetary Authority of Singapore. We are also seeing the revamping of some BSAs. As a result, in addition to the USD240 billion buffer the CMIM Arrangement provides, the region is now equipped with a network of BSAs roughly amounting to an additional USD250 billion. At the global level, the IMF has been reviewing its facilities periodically to ensure they are adequate to meet the financing needs of the members.
The challenge now is how these different sources of firepower can come together to ensure a timely and well-coordinated response when the need arises. In this regard, AMRO has been supporting the CMIM members to enhance collaboration between the CMIM and the IMF through joint test runs, information sharing, and other activities. The time is also right for CMIM members to start a dialogue to ensure that the CMIM and BSAs can operate seamlessly whenever there is a need.
As macro-financial stability is strongly connected with long-term economic development, it is also important for the CMIM to further enhance collaboration with regional multilateral development banks such as Asian Development Bank (ADB) and Asian Infrastructure Investment Bank (AIIB). Collaboration between Regional Financing Arrangements (RFAs) and multilateral development banks was one of the highlights of the Third High-Level RFA Dialogue held at the margins of the IMF/ World Bank Group Annual Meeting in Bali, Indonesia in October. Participating in the dialogue, AMRO and ADB exchanged views on how to strengthen collaboration between the two institutions in order to contribute to safeguarding regional macroeconomic and financial stability, and to support the achievement of regional development goals. Going forward, AMRO will continue playing an important role in CMIM members’ possible collaborations with the regional development banks, including possible co-financing with the CMIM.
The global economy is presently in a state of flux, with plenty of uncertainty around the international trading regime and fears around its potential spillovers into the financial markets. In such a context, it is imperative for international organizations and multilateral development banks to work together with regional governments to secure and protect the region’s future economic prosperity.
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