Asian financial regulators agreed on Tuesday to strengthen market protection amid heightened fears of a global recession and volatile financial markets at the annual ASEAN Plus Three meeting for finance ministers and central bank governors in Incheon, South Korea.
“The meeting recognizes that the ASEAN Plus Three financial cooperation has played an increasingly essential role in supporting regional economies to address risks and challenges.”
Members of ASEAN Plus Three
The ASEAN Plus Three — consisting of all ten members of the Association of Southeast Asian Nations, Japan, China and South Korea — agreed to enhance its credit swap line program, the Chiang Mai Initiative Multilateralization (CMIM). The program was initiated in 2000 after a major Asian financial crisis to help member countries deal with significant capital outflows.
Member countries have never used the swap lines, even during the peak of the COVID-19 pandemic, leading to suggestions to increase the accessibility to the program. Analysts said the recent volatility in the market prompted Asian policymakers to consider the program even though they insisted that their countries held enough foreign reserves and buffers to prevent another crisis.
In addition to the CMIM, participants discussed the establishment of a “rapid financing facility,” which would help ASEAN Plus Three members access financing to fulfill urgent payment needs caused by “sudden exogenous shocks, such as pandemics and natural disasters.” They also agreed on the need to gradually list pandemic-related restrictions as the situation improved.
According to a forecast by the Asia Development Bank, Asia will achieve solid economic growth of 4.8 percent this year, higher than the 4.2 percent growth in the previous year due to China’s economic rebound.
However, the recent banking crisis in the U.S. raised concerns about vulnerabilities in the global banking system. U.S. financial authorities shut down two regional lenders, Silicon Valley Bank and Signature Bank, in March after they experienced liquidity shortages. It resulted in the volatility of the U.S. dollar and global equity markets, with analysts saying that the crisis has a longer-term effect on the overall economy.
Analysts said Asian policymakers were also concerned about the possibility of higher market turbulence resulting from the U.S. Federal Reserve’s aggressive interest rate hikes. Since the Fed began its monetary tightening cycle last year to tame inflation, analysts have cautioned that the central bank’s hawkish rate policy could tip the U.S. economy into a recession. A recession in the U.S. will likely affect other economies, which are also dealing with soaring inflation.
South Korean Finance Minister Choo Kyung-ho said Asia and other countries must cooperate in the current macroeconomic environment during a meeting with Japan and China before the ASEAN Plus Three gathering. The Chinese finance minister and central bank governor were not present at the meeting, represented by their deputies.
In a joint statement, the three countries said they understood the need to strengthen economic and trade relations to “secure post-pandemic growth, minimize any lasting negative effects, and prepare for future shocks.”
South Korea, Japan and China also noted a recent slowdown in economic relations between them, especially in the trade of goods and services. South Korea and Japan plan to make the financial discussion a regular event between the two countries, especially since they have not held a bilateral financial meeting in seven years.
ASEAN countries working to boost regional resilience
Earlier in March, financial authorities of ASEAN countries held a meeting to discuss ways to improve the region’s economic resilience. Among several topics discussed in the meeting, ASEAN members called for efforts to reduce dependence on the U.S. dollar, euro and yen.
ASEAN aims to further boost the use of local currencies in regional trade through the Local Currency Transaction (LCT) scheme, an expansion of the previous Local Currency Settlement (LCS) scheme. Member countries plan to further develop cross-border digital payment systems to accommodate the program.
Indonesian President Joko Widodo has previously said that reducing dependence on foreign currencies and payment systems is necessary to protect ASEAN members from “possible geopolitical repercussions,” making sure that settlements between the member countries are secure.