REGIONAL FINANCIAL SAFETY NET: PROGRESS AND READINESS€¦ · REGIONAL FINANCIAL SAFETY NET: PROGRESS AND READINESS Perry Warjiyo, Ph.D Deputy Governor of Bank Indonesia Jakarta,

GLOBAL ECONOMIC OUTLOOK

IN ASEAN PERSPECTIVE

REGIONAL FINANCIAL SAFETY NET:

PROGRESS AND READINESS

Perry Warjiyo, Ph.D

Deputy Governor of Bank Indonesia

Jakarta, 28 April 2017

International Seminar

Evolution of Regional Safety Net in AsiaIn the aftermath of the Asian Financial Crisis in December 1997, leaders from 10 ASEANcountries, China, Japan and South Korea agreed in Malaysia to create ASEAN+3 regionalfinancial cooperation with focus on improving regional resilience to cope with externalturbulence in the future. The initiative is conducted by developing two areas of regional selfhelp mechanism to resolve regional short-term liquidity problem, crystalized in Chiang Mai,Thailand in May 2000 (Chiang Mai Initiative – CMI):

ASEAN Swap Arrangement (ASA): ASEAN-5 Central Bank Governors in August 1977 signed ASA Agreement amounting USD100 million. ASA is an ASEAN financial cooperation aiming to provide short term financial assistance in the form of USD/JPY/Euro swap to member with BoP problem. In November 2000, 10 ASEAN members increased the amount of USD 1 billion and in April 2005 to USD 2 billion.

Networks of Bilateral Swap Arrangement (BSA): ASEAN and plus three countries established BSA, a US dollar and domestic currency swap with objective to provide liquidity support to members experiencing short-term liquidity and balance of payment problem as a supplement to previously available international financial arrangements. Implementation is conducted by the central banks as authorities responsible for the stability of exchange rate.

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Chiang Mai Initiative Multilateralisation

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Decision making in CMIM activation by ELDMB through voting mechanism. Request for activation will be granted if approved by 2/3 of Effective Votes.

Voting power is determined by financial contribution in the reserves pool. Currently, voting power in CMIM by Plus 3 countries of 71,59%.

Indonesia’s contribution is USD9.104 billion (4,37% voting power).

CMIM-Precautionary Line

• Potential short term liquidity and or BOP difficulties

• Repayment: de-linked portion in 6 months; linked portion in 12 months

CMIM-Stability Facility

• Actual urgent short term liquidity and or BOP difficulties

• Repayment: de-linked portion in 6 months; linked portion in 12 months

CMIM Modalities• The Chiang Mai Initiative Multilateralisation (CMIM) is amultilateral currency swap arrangement among the tenmembers of the Association of Southeast Asian Nations(ASEAN), China, Japan, and South Korea.

• It is an initiative to resolve regional short-term liquidityproblem, and to facilitate the work of otherinternational financial arrangements and organizationssuch as the International Monetary Fund.

• It draws from a foreign exchange reserves pool worthUS$120 billion and was launched on 24 March 2010.That pool has been expanded to $240 billion in 2012.

• In addition, IMF de-linked portion is raised from 20percent to 30 percent and with its future goal ofreaching 40 percent originally targeted in 2014.

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Key Progress on CMIM Enhancement and Readiness

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PROGRESS

The comprehensive framework for assessment: Economic Review and Policy Dialogue (ERPD) Matrix with a new set of indicators (External, Fiscal, Monetary, Financial Sector, and Data Adequacy)

Pilot Projects for the ERPD Matrix Implementation: Preliminary Report is underway

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Commitment to strengthen the CMIM: “to increase the IMF de-linked portion to 30% in 2012 with a view of increasing it to 40% in 2014 subject to review should conditions warrant”

Endorsed the description of indicators and review methodology

Yet, still no consensus on whether to increase the IMF de-linked portion to 40%

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Progress to ensure the operational readiness of the CMIM: the opening of Local Currency (LCY) accounts, usability of General Account with FRBNY, SWIFT Account, and teleconference/video-conference devices

A New Batch of Peacetime Preparation Checklist: (i) swap transaction mechanism with FRBNY; and (ii) internal test run

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Since 2013, members have successfully conducted 7 test-runs

In 2016, test run was conducted for the IMF-linked portion of CMIM-SF facility with participation of the IMF providing co-financing: brought issues regarding coordination process and CMIM framework

The 8th test-run will be conducted in the 2H2017, also with IMF

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Established by ASEAN+3 in 2011 as an international organization with the purpose of contributing to securing economic and finansial stability of the region through conducting regional economic research and supporting the implementation of CMIM, and the following functions:

a) Monitor, asses and report to members on the macroeconomic status and finansial soundness;

b) To indentify for members macroeconomic and finansial risks and vulnerabilities in the region and assist them, if requested, in timely formulation of policy recommendations to mitigate these risks;

c) To support members of the implementation of regional finansial arrangements; and

d) To perform other activities as directed by the Executive Committee.

ASEAN+3 Macroeconomic Research Office (AMRO)

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Purposes

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Functions

Key

Developments

• Registered as international organization in early 2016 located in Singapore with purpose and functions as above.

• Strengthened institutional capacity with clear strategisc business plan and work programs on the areas of surveilance, CMIM readiness, and organizational development to be carried by ED, Chief Economists, and 2 DD supported by about 55 economists/staff.

• Encouraging progress on surveillance capacity of AMRO in the forms, among others: country regular report, market updates, regional economic report, surveillance guidance notes.

Global Financial Safety Net (GFSN)

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Enhance Early Warning System and Capital Flows Management Measures;

Enhance Global Financial Safety Net (GFSN) as the main component ofsound and stable international monetary system with IMF as the center,and cooperation between IMF and Regional Financing Arrangements;

Increase quota for emerging economies in IMF;

Enhance debt sustainability and debt restructuring process;

Reduce global dependence on USD through enhancing the role for the SDR.

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GFSN established under IMF : Provide lending facilities for crisis prevention (FCL & PLL) and crisis resolution (SBA)

RFAs established in various regions of the world: Provide lending facilities for crisis prevention and resolution, and Others financing/loans

Bilateral Arrangement established among central banks.

2nd Line of DefenseNational financial safety nets: Sound economic

policies International

reserves Prudential

management

1st Line of Defense

The GFSN is comprised mainly of countries' own reserves andexternal public sources of insurance and financing. The mainexternal official arrangements are central bank bilateralswap arrangements (BSAs), regional financial arrangements(RFAs), and the Fund. The safety net seeks to providecountries with insurance against crises, financing whenshocks hit, and incentives for sound macroeconomic policies.

IMF New Facility and Potential GFSN-RFA Linkage

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CRISIS PREVENTION

Flexible Credit Line (FCL)

• Qualification criteria: fulfiling 5 out of 5 areas.

• Potential and actual BOP problem due to key tail risk.

• No conditionalities.

• Repayment: 3¼ to 5 years.

Precautionary Liquidity Line

(PLL)

• Qualification criteria: fulfilling 3 out of 5 areas.

• Potential and actual BOP problem.

• With conditionalities.

• Repayment: 3 ¼ to 5 years

Stand-by Arrangement (SBA)

• BOP problem.

• Repayment: 3 ¼ to 5 years

CRISIS RESOLUTION The Need for new Liquidity Swap Line (LSL)

• To fill in GFSN gap by extending swap like liquidity support to a wider group of very strong countries and to help address ‘stigma’ issues.

• To give support for potential, moderate, and short-term liquidity needs arising from external shocks. The BOP needs are expected to be limited in scale and require onlya fine-tuning of central bank policies.

• To complement other GFSN layers and to provide additional protection to countries own reserves, existing bilateral swaps and RFAs.

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GLOBAL ECONOMIC OUTLOOK

IN ASEAN PERSPECTIVE

REGIONAL FINANCIAL SAFETY NET:

PROGRESS AND READINESS

Perry Warjiyo, Ph.D

Deputy Governor of Bank Indonesia

Jakarta, 28 April 2017

International Seminar