An Asian IMF?
By Jon Fernquest[Introduction|Vocabulary|Article]
[Reading Questions|Answers]
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When financial crises happen, they often occur suddenly and for reasons that no one fully anticipated.
What if had been possible to resolve the 1997 Asian financial crisis locally with Asian equivalents of the IMF and World Bank?
What if there had been no need to rely on the IMF in 1997?
Would recovery have been swifter?
ASEAN+3 finance officials from around Asia met in Chiang Mai yesterday to work on local ways to deal with economic problems.
The meetings are part of the Chiang Mai Initiative founded in 1999.
Reading Questions
Here are some questions to guide your reading (See answers at end):1. What exchange rate regime did Asian finance officials agree is most appropriate for Asia?
2. What other kinds of policies must support exchange rate policy?
3. Who is the oft-quoted and cited Suparat?
4. What problems have all Asian economies faced in international trade recently? Why?
5. Why have Asian countries tried to keep their currencies from appreciating recently?
6. What steps have Asian countries taken to check currency appreciation?
7. Is policy transparency good or bad, according to Suparat? Explain.
8. How do domestic interest rates contribute to the appreciation or depreciation of the exchange rate?
9. What is sterilisation? How does it affect currency appreciation?
10. Why would establishing one common ASEAN currency right now be difficult?
11. What is the Chiang Mai Initiative? When did it begin? Who started it and why?
12. What plans were made to expand the Chiang Mai Initiative?
13. What is the Asian Bond Market Initiative? When was it established and why?
14. What new area will the regional bond market begin to focus on?
Bangkok Post Article April 05, 2007
ECONOMY / ASEAN FINANCE OFFICIALS' MEETINGFlexible exchange rates a must
WICHIT CHANTANUSORNSIRIChiang Mai - Asian finance officials yesterday agreed that flexible exchange-rate policies were the best way to cope with increasingly volatile capital flows. But exchange-rate policies need to be matched with suitable macroeconomic policies in other areas, particularly interest rates, according to Suparut Kawatkul, the permanent secretary of Thailand's Finance Ministry.
Senior officials from the finance ministries and central banks of the 10-member Asean grouping plus China, Japan and South Korea met yesterday to discuss ways of improving regional co-ordination and collaboration.
Chairing yesterday's meetings, formally titled the Asean+3 Finance and Central Bank Deputies' Meeting, was Li Yong, the vice-minister of finance for China.
Market volatility was a key point of discussions, as Asian countries have struggled to keep their currencies stable in the face of a weakening US dollar and more volatile capital flows into the region.
Many countries have intervened heavily in currency markets and allowed their foreign reserves to rise sharply in a bid to keep their currencies from appreciating to protect their export competitiveness.
Mr Suparat said a key message from the meetings was the need for a "well-defined, targeted policy mix" to cope with volatility in capital flows.
"You need policy measures that are well defined, with a clear target and that is clearly communicated to the market," he said.
Flexible exchange-rate systems, such as the managed float system used by Thailand, were generally agreed to be [more] suitable than fixed-rate systems.
Interest rates were also deemed to be a key element of each country's overall exchange-rate strategy. High domestic rates in theory help to attract capital from investors seeking higher yields, potentially resulting in currency appreciation.
Asian countries, including Thailand, have reacted through the issue of domestic bonds to help absorb excess liquidity from the market, a process known as sterilisation. The Bank of Thailand has issued some one trillion baht worth of bonds since 2003 to help absorb market liquidity.
Policymakers also discussed a research report on the possibility of establishing a regional monetary unit similar to the euro to help stabilise the regional economy.
But most economists agree that regional economic integration and a common currency are decades away, given the vastly different stages of development of the various countries in the region.
Mr Suparat said senior officials yesterday also discussed ways to expand the Chiang Mai initiative, encouraging bilateral agreements among the Asean+3 group to offer liquidity support during trade crises.
The Chiang Mai initiative was developed in 1999 at the urging of Thailand to develop mechanisms to better tap regional resources to avoid a repeat of the financial crisis that had erupted two years earlier. Currently, 16 bilateral arrangements exist involving funds of $80 billion.
Mr Suparat said the meeting agreed that the initiative should be expanded to a regional scale, under which each country reserves a portion of its foreign reserves for use by other members in a pool.
Asean+3 leaders plan to approve the concept at a summit in Tokyo on May 5.
Under the new system, reserves would be self-managed by each country but considered a part of a central pool. The reserve pool could come under a central management structure in the future.
Officials also discussed progress of the Asian Bond Market initiative, launched after the 1997 crisis to strengthen regional bond markets to better serve as a source of capital for development.
Since 2002, regional bond markets have increased by 250% or $1 trillion.
Also discussed was a new infrastructure finance mechanism, using regional bond issues for infrastructure development.
Vocabulary (in discussion above)
volatility - sudden and unpredictable changes, going up and down frequently
volatile capital flows, volatility in capital flows - when investment suddenly enters a country, due to exchange rate or interest rate changes for example, and then quickly leaves, like a tsunami (businesses need stable levels of investment and exchange rates so they can predict the future and succeed in business)
flexible exchange-rate - a country's exchange rate is allowed to rise and fall with market demand and supply of its currency
intervene in - become involved in and try to change
managed float system - a flexible exchange rate, but the central bank sometimes enters the market (intervenes) to reduce volatility (See Wikipedia)
fixed-rate systems - a country's exchange rate is fixed and tied to other currencies, Thailand's exchange rate was fixed at around 25 baht for many years (See Wikipedia)
cope with a problem - deal with and manage a problem (problem not completely solved)
ASEAN - the organisation for regional cooperation between Southeast Asian states (Thailand, Vietnam, Singapore, Malaysia, Laos, Brunei, Indonesia, Cambodia, and Myanmar) (See Wikipedia)
co-ordination - when different groups organise their work together to: 1. work together efficiently, and 2. know what other groups are doing
collaboration - working together to produce something or achieve some objective
chairing a meeting - in charge of a meeting, managing the meeting, leading the meeting
Asean+3 - the Southeast Asian countries of ASEAN plus China, South Korea, and Japan (See Wikipedia on ASEAN+3 and East Asia Summit)
in a bid to - attempt to do
export competitiveness - how desirable a country's products and services are compared to other countries in the world (for example if there is exchange rate appreciation, then the international price of exports rises, and they become less attractive to international buyers)
absorb excess liquidity from the market - exchanging bonds for money to decrease the amount of money in circulation (money supply) (pretend the bonds are a sponge and water is money)
sterilisation - buying up and accumulating foreign exchange reserves, as Thailand has been doing recently, increases the money supply, to cancel this increase, the central banks sell bonds, exchanging the bonds for the new money, thereby decreasing the new money that was created, this is called sterilization.
(See Economist Glossary on Sterilized Intervention)
a regional monetary unit - like the Euro used in the European Union (EU), a currency used in a group of countries like ASEAN (See Wikipedia on Asian Currency Unit)
economies of scale - production costs decrease (economies) when production increases (greater scale) or "an increase in the number of units produced causes a decrease in the average cost of each unit." (See Wikipedia on Economies of Scale and Diseconomies of Scale)
regional economic integration - when smaller countries join together reducing barriers between their economies, thereby exploiting economies of scale that larger countries like the United States, China and Japan have (the European Union (EU) is the best example)
the Chiang Mai initiative - (See Wikipedia)
bilateral - between two countries (for example the Thai-Japan FTA)
multilateral - between many countries (for example the World Trade Organisation (WTO))
liquidity support during trade crises - getting foreign exchange reserves when your exchange rate has depreciated and you need them to continue normal economic activity (necessary imports, servicing loans, etc...)
tap a resource - use a resource not used yet
a pool, a central pool - sharing, when several people or countries collect their resources together and share them
reserve pool - several countries share their exchange reserves, helping each other when one has a problem
a summit - a high level meeting between the leaders of countries
Asian Bond Market Initiative - (See website and Wikipedia on Asian Bond Markets)
Answer Key:
1. What exchange rate regime did Asian finance officials agree is most appropriate for Asia?
A flexible exchange rate regime.
2. What other kinds of policies must support exchange rate policy?
Macroeconomic policies such as interest rate policy.
3. Who is the oft-quoted and cited Suparat?
Suparut Kawatkul is the permanent secretary of Thailand's Finance Ministry.
4. What problems have all Asian economies faced in international trade recently? Why?
Volatile capital flows and keeping their currencies stable, are problems that all Asian currencies have faced as the US dollar has weakened recently.
5. Why have Asian countries tried to keep their currencies from appreciating recently?
An appreciating currency decreases export competitiveness, because goods produced in the country become more expensive in the international market-place.
6. What steps have Asian countries taken to check currency appreciation?
Asian countries have "intervened heavily in currency markets" and "allowed their foreign currency reserves to rise sharply."
This means that Asian governments have been exchanging baht for foreign currencies which then becomes foreign currency reserves.
If the supply of baht increases like this, then the value of baht decreases (depreciates) or at least increases (appreciates) more slowly.
7. Is policy transparency good or bad, according to Suparat? Explain.
Policy transparency is good. Policy should:
a. Be well defined.
b. Have a clear target.
c. Be clearly communicated to the market.
8. How do domestic interest rates contribute to the appreciation or depreciation of the exchange rate?
High interest rates make investments in the country more attractive, so capital flows into the country, causing exchange rate appreciation.
Lower interest rates make investments less attractive, so capital flows out of the country, causing exchange rate depreciation.
("High domestic rates in theory help to attract capital from investors seeking higher yields, potentially resulting in currency appreciation.")
9. What is sterilisation? How does it affect currency appreciation?
See definition of sterilization in vocabulary section.
10. Why would establishing one common ASEAN currency right now be difficult?
Establishing a common ASEAN currency would be difficult because of the "vastly different stages of development of the various countries in the region," for example compare Singapore and Myanmar or Laos.
11. What is the Chiang Mai Initiative? When did it begin? Who started it and why?
The Chiang Mai Initiative was formed to find ways to better use regional resources within Asia (instead of the IMF) to avoid financial crises like the 1997 crisis.
The Chiang Mai Initiative began in 1999, two years after the 1997 financial crisis.
The Chiang Mai Initiative was started "at the urging of" Thailand.
("The Chiang Mai initiative was developed in 1999 at the urging of Thailand to develop mechanisms to better tap regional resources to avoid a repeat of the financial crisis that had erupted two years earlier. Currently, 16 bilateral arrangements exist involving funds of $80 billion.")
12. What plans were made to expand the Chiang Mai Initiative?
An agreement was made among the members of ASEAN+3 to help each other out by pooling foreign currency reserves. This reserve pool could be used by any member facing a trade crisis like 1997.
13. What is the Asian Bond Market Initiative? When was it established and why?
This initiative was started after the 1997 crisis to "strengthen regional bond markets to better serve as a source of capital for development."
14. What new area will the regional bond market begin to focus on?
Regional bond issues for infrastructure development.
