Japan to complete Indonesia forex swap

The Japanese Ministry of Finance (MoF) and the central Bank of Indonesia will sign a delayed foreign exchange swap deal in mid-February, the MoF said this week.

The deal, a $3 billion bilateral swap line, is part of the Chiang Mai initiative, an Asia-wide plan to share FX reserves in the event of a speculative attack on the region. There had been a delay in agreeing the deal, with both nations missing a deadline last August.

But analysts said the completion of the deal – one of the final bilateral swap arrangements to be signed – means it is more likely that all deals will be signed in time for the annual Asian Development Bank meeting in Istanbul in May.

The agreements – involving the 10 members of the Association of South East Asian Nations (Asean) plus Japan, China and South Korea – are intended to provide funds to finance short-term liquidity needs among members.

The plan has attracted criticism in the past. When it was agreed at the May 2000 Asean finance ministers’ meeting in the Thai city of Chiang Mai, an Asian Times editorial called the agreement “silly scheming” and predicted that in the event of a speculative attack on the region, the agreement would provide no protection.

Indeed, although the swap deals represent a large ‘war chest’, it appears unlikely that in the event of a one-way speculation on a regional currency that such swap agreements would be able to resist market forces. In 1996, for example, one year prior to the speculative attack on the Thai baht that wreaked economic havoc across Asia, $100 billion flowed into Asia with $150 billion leaving the country the next year.

The World Bank’s assessment of the plan does not inspire much hope in the plan either. “The simple fact is that such arrangements will not be able to withstand the full fury of market forces if markets are not convinced that domestic policies have not been reformed fully,” it said. “Such reforms need to focus in five areas – flexible exchange rates, encourage FDI (foreign direct investment) over short-term flows, capital market deepening, corporate governance, and increased market discipline. If these five policies work well, international arrangements, such as the Chiang Mai initiative, will not be necessary.”

However, in the context of increased regional economic cooperation in South East Asia, analysts said the plan is a healthy development.