A recent article titled “East Asia’s precautionary financing fix” (hereafter “the article”) suggested that, amid the global recession and threats of further capital outflows from emerging markets and developing countries, the ASEAN+3 members − comprising the 10 countries of the Association of Southeast Asian Nations (ASEAN) and China; Hong Kong, China; Japan; and Korea − can help their economies by tapping precautionary facilities. Philippines and Indonesia were cited, in particular, as members that would qualify and benefit from such precautionary arrangements to bolster defences against liquidity squeeze.

What are precautionary facilities?

Precautionary facilities are designed for countries with sound economic fundamentals that are not facing immediate crises but want insurance against a possible worsening of financial conditions. Under the International Monetary Fund’s (IMF’s) crisis prevention toolkits, products such as Flexible Credit Line (FCL), Precautionary and Liquidity Line (PLL) and Short-Term Liquidity Line (SLL) aim to help members with (very) strong economic fundamentals and policies prevent crises, and boost market confidence during periods of heightened risks.

The ASEAN+3 region also established a crisis prevention facility, called the Chiang Mai Initiative Multilateralisation Precautionary Line (CMIM-PL), which is a swap line for a CMIM member with “sound economic fundamentals” but is experiencing potential short-term liquidity and/ or balance-of-payment (BOP) difficulties.

What do recent economic assessments say?

Despite the increasingly bleak global economy, Asia is regarded as a relative bright spot. The IMF projects that the Asia and the Pacific region will grow by 4 percent this year and 4.3 percent next year. In particular, the Philippines is forecast to grow by 6.5 percent, the second-highest growth rate among ASEAN+3 economies, while Indonesia is projected to grow above 5 percent. AMRO’s assessment, as well as the Asian Development Bank’s, provide consistent views.

In addressing short-term liquidity and/or BOP difficulties, ASEAN+3 economies rely on different layers of safety nets, such as countries’ international reserves, bilateral swap arrangements, regional financial arrangement (CMIM) and the IMF facilities. Intuitively, the adequacy level of reserves, which is the economies’ first line of defense, serves as a barometer for any impending BOP difficulty. Official data (as of end-October 2022) indicates sufficient reserves for the Philippines and Indonesia, representing 7.5 months’ and 5.8 months’ worth of imports respectively, well above the 3 months of imports as headline threshold.

Bangko Sentral ng Pilipinas Governor Dr. Felipe Medalla has stated that the central bank has enough USD liquidity to stabilize and ease exchange rate pressures and will not use any bilateral of regional currency swap arrangements. Similarly, Bank Indonesia has stated that its official reserve assets remain adequate, supported by a stable domestic economic outlook.

The ASEAN+3 region is still facing various downside risks from a precarious global environment, slowing the region’s growth momentum. However, as Khor and Jiang (2022) observed, the ASEAN+3 economies are stronger and have implemented necessary structural reforms; built up $7 trillion foreign reserves in total; and assembled a multi-layered financial safety net. The authorities have also enhanced their toolkits to mitigate market and capital flow volatilities and support macroeconomic and financial stability.

To tap or not to tap — sufficient buffers remain

The article suggests that the Philippines’ and Indonesia’s access to precautionary arrangements will bolster their defence against possible liquidity difficulties. Based on recent assessments, both economies have sound economic fundamentals and effective toolkits to manage exchange rate stability and inflation. They could easily pass the first criteria for precautionary access. However, on whether these economies are experiencing a potential liquidity squeeze that would warrant PL activation, recent data, supported with the adequate policy tools, indicate otherwise. So far, both seems to have ample reserves as their first line of defence against liquidity difficulties and easing exchange rate pressures.

The cases of the Philippines and Indonesia are among the reasons why the CMIM has never been tapped. Member economies in the region still have sufficient foreign reserves as their first line of defence. Only when a country feels it needs more liquidity buffers will it use existing facilities.