ADB pushes ASEAN+3 credit scheme

Buyout of financial firms’ toxic assets opposed By Doris Dumlao
Philippine Daily Inquirer
First Posted 01:01:00 12/30/2008

Filed Under: ASEAN, Economy and Business and Finance, International Economic Institutions

The Asian Development Bank has called on the 10-member Association of Southeast Asian Nations (ASEAN) plus China, South Korea and Japan — in grouping called ASEAN+3 — to step up efforts to establish a regional credit guarantee and investment mechanism in view of the bleak global economic environment.

In its December Asia economic monitor, the ADB said the region should strengthen existing mechanisms under the ASEAN+3, particularly the Chiang Mai Initiative (CMI) framework for bilateral swaps. However, the ADB is not too keen on a proposal of the Philippine government to expand the CMI to take out bad assets of ailing financial institutions as what was being done in the western world.

The ASEAN consists of Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.

“Because the challenges facing Asian economies are structurally different from those in the US and Europe, strengthening the CMI should not imply mobilizing resources to buy toxic assets from regional financial institutions, but offering immediate liquidity injections to those economies which may have urgent needs,” the ADB report said.

“ASEAN+3 should also consider accelerating the establishment of a credit guarantee and investment mechanism (CGIM) to provide credit guarantees for domestic commercial banks’ loans and bond issuance to gain easier access to US dollar funding,” it said.

Such a guarantee is envisioned to lower the cost of fund-raising by banks given a lingering global financial turmoil, thereby boosting foreign exchange liquidity in the region.

The ADB vowed to work with the ASEAN+3 in establishing such a CGIM that will provide credit guarantees for commercial bank loans and bond issuance.

The ASEAN+3 pledged to expand and “multilateralize” the CMI, upgrading it to an $80-billion regional pool of which 20 percent would be financed by the ASEAN and 80 percent by China, Japan and South Korea.

Asian authorities were also urged to consider establishing an Asian Financial Stability Dialogue to coordinate efforts to address the financial crisis.

“Many national governments introduced measures to support their banking systems to help stabilize financial markets and facilitate economic recovery,” the report said.

Coordination of these national measures from a regional and global perspective could help ensure the actions of one country do not add stress to a neighbor’s financial system by forcing them into inappropriate or rash ad hoc responses, the ADB pointed out.

“The region has the opportunity to take collective action to address the knock-on effects of the global financial crisis,” the ADB said.

In the meantime, the ADB warned against excessive foreign exchange intervention. While some intervention seemed warranted given the extreme volatility in the market, it said excessive support of the exchange rate and depletion in foreign exchange reserves would make economies more vulnerable to future shocks and constrain policy maneuverability.

It said the region’s authorities should remain cautious, as excessive interventions might eventually increase the risk of one-way bets on their currencies, leading to greater exchange rate volatility and a more disruptive adjustment down the road.

In some economies with relatively rigid currency regimes, the ADB said, introducing greater flexibility may also help enhance the effectiveness of monetary and fiscal stimulus, while rebalancing demand.

Policymakers in many emerging East Asian economies need to deepen and broaden structural reforms to rebalance the sources of growth from an over-reliance on exports to domestic demand, it said.