ASEAN+3 Beef Up Defences Against Currency Volatility

March 18, 2012Asiaby EW News Desk Team

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The ASEAN+3 forum – a group made up by countries in the Association of Southeast Asian Nations (ASEAN), together with China, Japan and South Korea – will double the amount of funds available under a regional currency swap pact, in order to safeguard their economies from future currency volatility.

Presently, the group’s currency swap pact, known as the Chiang Mai Initiative, has a foreign exchange reserves pool worth $120 billion, though experts now believe that the fund may not be enough considering the financial perils emanating from the European debt crisis.

According to Aladdin Rillo, the director and chief economist of the ASEAN integration monitoring office in Jakarta, a task force of technocrats from the group of nations had already proposed boosting the group’s $120 billion war chest earlier this month; with the deal likely to be approved by March 28 when the deputy finance ministers and central bank governors of all the countries meet in Cambodia.

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"Right now economic uncertainties have escalated," so the task force decided more money was needed in the case of emergencies, told Rillo to the Wall Street Journal on Sunday.

The Indonesian economist added that the most likely figure for its new war chest was $240 billion, especially as the 13 participating countries had pledged to help any its fellow members from currency attacks by using their foreign currency reserves.

Asian economies were particularly vulnerable to currency speculation in the past, most notably in the 1990s, when big currency bets by external speculators eventually contributed to the Asian Financial Crisis.

Since then, the ASEAN+3 forum has never had to call upon any of its pledge funds, though the concern over Europe has prompted the region to increase its currency firewalls.

Earlier this month, the same task force – that recommended increasing the size of the currency swap pact – also suggested that the scope of the Chiang Mai Initiative could be expanded to include closer monitoring of Asian fiscal issues.

“The (initiative) has always been about short-term liquidity support but I think they now want to go beyond that," said Rillo.

"The perception is they want to have a bigger role for the Chiang Mai Initiative giving more proactive advice on how to prevent problems and more regional surveillance."

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Presently, up to 20 percent of the funds available can be used without linkage to loans by the International Monetary Fund.

The ASEAN+3 countries are also expected to agree to raise this percentage significantly when they meet in Cambodia.

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