Southeast Asian financial integration?
By Jon Fernquest[Introduction|Vocabulary|Article]
[Reading Questions|Answers]
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Today's article is about the ongoing Singapore IMF meetings.
Yesterday, there were discussions on Southeast Asian financial integration.
First, here's some necessary background information for the article.
The trend towards financial integration in Southeast Asia started after the 1997 Asian financial crisis.
After the 1997 financial crisis, Southeast Asia developed bond markets that used local currencies as a substitute for foreign bank borrowing which they had relied too much on in the past.
The Asian Bond Market Initiative (ABMI) was developed to focus these efforts.
The growth of Thailand's bond market has been phenomenal since 1997. Thailand and South Korea now "have the largest corporate bond markets in the world measured as a percentage of GDP." In 2004 "bond issuance accounted for 75% and 39% of GDP in South Korea and Thailand respectively compared with 80% and 73% for bank loans."
Before the 1997 Asian financial crisis Thailand experienced two kinds of financial mismatch that contributed to the crisis. First, there was a currency mismatch meaning that assets were in baht and loans (liabilities) were in dollars. Second, there was a maturity mismatch between loans and assets, meaning that Thais held long-term assets, but their liabilities were short term bank loans. Just imagine, if you bought a long-term asset like a house that is difficult to sell in the short-term with a short-term bank loan. Then suddenly the short-term bank loan was pulled out of the banking system and returned to the US, Europe, or Japan. You would have a big problem. The logic is that money from the region invested back into the region is less likely to be pulled out like this, so a crisis is less likely.
(Source: "Recent developments in monetary and financial integration in Asia," Banque de France, Financial Stability Review, No. 8 • May 2006: pages 121-122)
In the future, financial integration will allow Southeast Asian economies to pool their resources and reduce the mismatch and risk.
Reading Questions
Here are some questions to guide your reading (See answers at end):1. What would financial integration of Southeast Asian economies achieve?
2. Has regional economic integration increased in Southeast Asia recently? What evidence is there of this?
3. What would be byproducts of financial integration, according to the Thai central bank governor?
4. What would an intra-regional payment system ultimately dominate?
5. What would Southeast Asian countries have to remove to make a financial integration system work?
6. What has been the problem with the Asian Bond Fund initiative?
7. How does the growth of financial integration in Asia differ from Europe's?
8. What have Asian countries learned from the Asian financial crisis?
9. What two things do Asian economies need for financial integration?
Bangkok Post Article: September 19, 2006
FINANCE IMF/WORLD BANK MEETINGSRegional integration can help drive costs down, say central bankers
PARISTA YUTHAMANOPSingapore - Greater financial integration within Asia would help reduce mismatches and transaction costs as a result of using the US dollar as the primary medium for settlement, say regional central banks. But full integration and a common currency similar to the European Union could take decades, experts agreed at a discussion on regional integration at the annual IMF/World Bank meetings.
Zeti Akhtar Aziz, the governor of Malaysia's Bank Negara, said regional economic integration had occurred with the sharp rise in intra-regional trade, which now accounted for 60% of Malaysia's exports.
''Regional integration is distinguished in that it has been private sector-driven. It is simply a way to recycle investment in the region. But regional countries need to develop their own financial market, especially bonds,'' she said.
M.R. Pridiyathorn Devakula, the governor of the Bank of Thailand, said the fact that Asian countries used the dollar to settle could bring about mismatches in time zones and currency risk.
He proposed that the region undertake greater integration of trade finance, which could later be transformed into deeper integration efforts.
''The byproduct of trade finance integration is that banks could move from outside to the region because transactions among countries in the region would happen in the same time zone. We could see more secondary markets in the region,'' M.R. Pridiyathorn said.
''And over time, the integration could expand, if the intra-regional payment system dominates dollar transactions in the region,'' he added.
The initiative would need regional countries to remove cross-border restrictions to facilitate the system, M.R. Pridiyathorn said.
Efforts toward regional co-operation such as the Asian Bond Fund initiative have not drawn as much foreign investment as earlier expected.
Intra-regional portfolio investment, at 4% of the region's gross domestic product in 2004, was too low to support expansion of the Asia Bond Fund, he said.
Barry Eichengreen, an economist and political scientist with the University of California, noted that Asia's regional financial integration was ''economic-led'', unlike in Europe, where integration was ''politics-led''.
''Willingness to allow a greater foreign exchange system in the region would be important to regional financial integration. We have learned from the economic crisis that to open capital accounts while keeping a fixed exchange-rate system is a recipe for disaster,'' he said.
Hiroshi Watanabe, Japan's vice-minister for finance for international affairs, said the fact that Asian countries had recovered from the 1997 crisis had created a good position to consider financial integration.
But Asian countries needed to have deeper financial markets to draw investment from foreign investors. Tax regulations also needed to be revised to facilitate cross-border transactions, he said.
Lawrence Summers, a former US treasury secretary and now a professor at Harvard University, said Asian and oil-exporting countries could face growing challenges in managing their foreign-exchange reserves in the future as they continue to accumulate.
Portfolio diversification was needed to help reduce risks, he said.
Meanwhile, the member governments of the IMF approved a plan to give more voting power to China, South Korea, Mexico and Turkey.
The radical overhaul was backed by 90.6% of the vote, according to German Finance Minister Peer Steinbrueck, above the 85% needed. The IMF is dominated by the US, EU and Japan.
Vocabulary (in discussion above)
financial integration - when the financial systems of countries share financial markets, services, and in the extreme a common currency
transaction costs - the costs associated with the process of buying and selling, the costs of running and policing financial markets
medium for settlement (also "used the dollar to settle") - the money used for payment when you buy something internationally (for example in the last century gold was used as the international medium of settlement, traditionally US dollars have been used to pay for most oil purchases but there is recent move towards the use of the euro, see Wikipedia on Petrodollars)
private sector-driven - is developing through private businesses, not government efforts
recycle investment in the region - money to be invested gets invested in the region, rather than leaving the region
byproduct of - an additional extra thing that you get when producing something
intraregional payment system - system for making payments between countries but withinin the same region such as Southeast Asia
Asian Bond Fund initiative - a program to promote bond markets in Asian banks led by Asia's central banks (Read a history and Wikipedia on Asian Bond markets)
open capital accounts - money can flow freely into and out of a country's financial system without restrictions
deeper financial markets - more of a country's wealth is traded in financial markets (greater market capitalisation) (Read IMF Handbook on Indicators of financial market structure, development, and soundness)
foreign exchange reserves - foreign currencies such as the US dollar, yen, euros, and pounds held by central banks (See Wikipedia)
portfolio diversification - spreading investments around in many different kinds of assets to reduce risk (risk is reduced because asset values do not all move in the same direction in the same time)
radical overhaul - repair and improve the whole system so that it works better
Answer Key:
1. What would financial integration of Southeast Asian economies achieve?
It would help "help reduce mismatches and transaction costs as a result of using the US dollar as the primary medium for settlement."
These mismatches are of two kinds, maturity and currency. See introduction above.
2. Has regional economic integration increased in Southeast Asia recently? What evidence is there of this?
Yes, there has been a "sharp rise in inter-regional trade." A majority 60% of Malaysia's exports are now within the region.
3. What would be byproducts of financial integration, according to the Thai central bank governor?
a. International banks would move into the region
b. Transactions among countries in the region would happen in the same time zone
c. There would be more secondary markets in the region.
4. What would an intra-regional payment system ultimately dominate?
An intra-regional payment system would ultimately dominate dollar transactions in the region.
5. What would Southeast Asian countries have to remove to make a financial integration system work?
They would have to remove cross-border restrictions on financial flows.
6. What has been the problem with the Asian Bond Fund initiative?
The initiative has not attracted enough foreign investment and investment within the region, at 4% of GDP, is not enough to drive the expansion of the bond market.
7. How does the growth of financial integration in Asia differ from Europe's?
In Europe, financial integration is driven by politics, whereas in Asia it is driven by economics.
8. What have Asian countries learned from the Asian financial crisis?
A fixed exchange-rate system with "open capital accounts" will lead to disaster.
9. What two things do Asian economies need for financial integration?
First, they need "deeper financial markets to draw investment from foreign investors. Second, taxes need to be reduced to make cross-border transactions easier.
