Swap stabilisers

Chris Jeffery

The economic picture has become markedly gloomier for many of Asia's economies in the past three months, with a slowdown in the city states of Hong Kong and Singapore, as well as major Asian economies such as China, Japan and South Korea. This was clearly illustrated by Japanese exports tumbling nearly 46% in January having already dropped 35% in December.

The latest data indicates how tough life is getting for many corporates, which is in turn putting pressure on financial services sector in Asia.

South Korean banks, for example, have faced acute onshore dollar funding problems for some time. This was highlighted again when Woori Bank said last month it would not exercise calls on its $400 million, Singapore-listed, 10-year subordinate notes due to adverse markets. This was an unusual step, and evidence that replacement costs are higher than under the terms of the outstanding debt.

But policy makers are moving fast to establish processes to promote greater financial stability. And they are in a relatively strong position - compared with their counterparts in eastern Europe, at least - given the high levels of savings and foreign-currency reserves in Asia.

A major initiative aimed at bolstering stability is the increase in size and scope of region-wide currency swap arrangements. These shared pools of short-term currency-drawdown arrangements can help countries deal with short-term imbalances, such as shortages of certain currencies on shore.

The Association of Southeast Asian Nations - along with China, Japan and South Korea - plans to increase this pool of bilateral currency swaps from the current $80 billion to $120 billion by May. Moreover, these countries intend to increase from 10% to 20% of the total pool the proportion of funds individual nations can draw on without the need for International Monetary Fund 'conditionalities'.

Countries are also putting in place more bilateral deals. Hong Kong and China are finalising details of a 200 billion renminbi ($29.2 billion) currency swap facility. Meanwhile, Singapore and South Korea have put in place a $30 billion facility with the US Federal Reserve, India has set up swap facilities with several central banks and Indonesia is pressing to increase the scale of its bilateral swap deals.

These efforts should mean countries are better placed to head off potential problems. South Korea has already used $10.4 billion of its $30 billion Fed facility in an attempt to bolster the supply of dollars onshore, following a government pledge to guarantee up to $100 billion of local banks' refinancing out to three years.

It is clear that Asian nations can and should move to ensure regional stability.

Christopher Jeffery.

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