TOWARDS ASEAN FINANCIAL INTEGRATION
Remarks by Mr. Ong Keng Yong, Secretary-General of ASEAN at the Economix 2004 Conference,
University of Indonesia
Jakarta, 18 February 2004
1. I have been requested by the organizers of the Economix 2004 Conference to speak on ASEAN monetary cooperation and, in particular, the steps being taken towards an ASEAN single currency.
2. I have to say at the outset that ASEAN does not have yet the conditions for an optimal currency area or currency union. I will explain this in a little while. Nevertheless, ASEAN is undertaking certain policies and projects that are expected to achieve some of the objectives of a single currency arrangement. In the process, this would also contribute to the necessary conditions for adopting a common regional currency.
3. Before I proceed to explain what the ASEAN finance and central bank officials have been doing, let us review first what the objectives of adopting a common regional currency are. I will then briefly refer to the experience of the European Union to help us understand the subject better.
The objectives of a single currency
4. The overall goal of a single currency is to contribute to the financial stability of a regional economy, including price stability.
5. For countries which are members of a monetary union, a single currency means lower cost or risk of cross-border business through the elimination of currency risk. Greater flows of intra-regional trade would put pressure on prices, resulting in cheaper goods and services.
6. Individuals benefit not only from the lowering of prices, they also make savings by not having to change money when traveling within the union, by being able to compare prices more readily, and by the reduced cost of transferring money across borders.
Conditions for a single currency
7. Two of the most important criteria on the suitability of a common currency are (i) the intensity of intra-regional trade and (ii) convergence of macroeconomic conditions.
8. A substantial intra-ASEAN trade and economic integration is an incentive for a monetary union. But while intra-ASEAN trade is growing, partly as a result of the ASEAN Free Trade Area or AFTA, the proportion remains relatively small. The reality is that ASEAN trades more with other countries (80%) than among its member countries (20%). Therefore, ASEAN economies are more concerned about currency stability against major international currencies, like the US dollar, than among themselves.
9. On macroeconomic conditions, ASEAN member countries have different levels of economic development, capacity and priorities that translate into different levels of interest and readiness for economic integration. Monetary integration, in particular, implies less control over national monetary and fiscal policy to stimulate the economy. Therefore, greater convergence in macroeconomic conditions would improve conditions and confidence for a common currency.
The case of the European Union
10. The European Union decided to form a monetary union in the early 1990s, which came into being on 1 January 1999. The essence of the Economic and Monetary Union or EMU is the adoption of a common currency (known as the euro) and the European Central Bank (ECB). The principal mandate of the ECB is to enhance price stability within the region, which is important for business because intra-European trade takes up more than 60% of the total European trade.
11. The introduction of the euro is the final stage of the economic and monetary integration after two interim stages, starting in 1990 and 1994. In the first stage, foreign exchange restrictions were eliminated. At the same time, a clear line was drawn between central banks and government. Governments could no longer turn to central banks for funds to help balance their books. The only alternative is to pursue sound fiscal policies.
12. From the start of the second stage, rules on pursuing broadly similar economic policies among the EU members applied. The European Commission was given responsibility for monitoring Member State compliance.
13. The third stage - and completion - of EMU meant not only the launch of the euro, but also that the disciplines of the Stability and Growth Pact took effect for all Member States. The European Central Bank (ECB) has taken over from euro-area national central banks full responsibility for monetary policy and for holding the foreign exchange reserves of the euro area. The Stability and Growth Pact sets the basic parameters of economic policy for all Member States. They must maintain budgets which are close to balance or in surplus. During a downturn, they must nevertheless keep budget deficits below 3% of their GDP.
ASEAN Surveillance Process
14. The financial crisis of 1997-1998 was a wake up call for ASEAN. To prevent its recurrence, the ASEAN finance ministers agreed in October 1998 to undertake closer consultations on economic and monetary policies called the ASEAN Surveillance Process or ASP.
15. This process has two major elements. The first is the monitoring of global as well as regional and national economic and financial developments.
16. Monitoring serves at least two purposes: to keep track of the recovery process and to detect any sign of recurring vulnerability in the ASEAN economies. The outcome of the monitoring exercise is reported to the ASEAN finance ministers twice a year. The ASEAN Surveillance Report, as the report is formally called, highlights economic and financial trends and recommends policy measures for the ministers to discuss during their peer review sessions.
17. The peer review, the second element of the ASP, provides the forum at which ASEAN finance ministers exchange views and information on developments in their domestic economies—including policy measures carried out and the progress of structural reforms. The review provides an opportunity to consider jointly unilateral or collective action to counter potential threats to any member economy. The ASP serves as an early warning mechanism.
The Chiang Mai Initiative
18. In May 2000, the Finance Ministers of ASEAN, China, Japan and the Republic of Korea agreed to establish a regional financing arrangement called the “Chiang Mai Initiative” or CMI, named after the City of Chiang Mai in Thailand,.
19. CMI has two components: an expanded ASEAN Swap Arrangement and a network of bilateral swap arrangements among ASEAN countries, China, Japan and the Republic of Korea.
20. The ASEAN Swap Arrangement or ASA preceded the regional financial crisis. ASA was originally established by the ASEAN central bank and monetary authorities of the five founding members of ASEAN with a view to help countries meet temporary liquidity problems. An expanded ASA now includes all ten ASEAN countries with an expanded facility of US$ 1 billion.
21. In recognition of the economic interdependence of East Asia, which has a combined foreign exchange reserves amounting to about US$ 1 trillion, a network of bilateral swap arrangements and repurchase agreements among ASEAN countries, China, Japan and the Republic of Korea has been agreed upon. The supplementary facility aims to provide temporary financing for members which may be in balance-of-payments difficulties.
22. To date, 16 bilateral swap arrangements (BSAs) have been successfully concluded with a combined amount of about US$35.5 billion.
Roadmap for the Integration of ASEAN in Finance
23. The Roadmap for the Integration of ASEAN in Finance is the latest regional initiative, which aims to strengthen regional self -help and support mechanisms.
24. The implementation of the Roadmap will contribute to the realization of the ASEAN Economic Community that was launched by the ASEAN Leaders in October last year in Bali. The AEC is the end-goal of economic integration as outlined in the ASEAN Vision 2020 and the Bali Concord II to establish a single market and production base, characterized by the free movement of goods, services, investment, and a freer flow of capital. The AEC will also facilitate the movement of businessmen, skilled labor, and talents within the region.
25. As in the EU, adoption of an ASEAN common currency when the conditions are ripe could be the final stage of the ASEAN Economic Community.
26. Under the Roadmap, approaches and milestones have been identified in areas deemed crucial to finance and monetary integration, namely (a) capital market development, (b) capital account liberalization, (c) financial services liberalization and (d) ASEAN currency cooperation.
27. Capital market development entails promoting institutional capacity, including the legal and regulatory framework, as well as the facilitation of greater cross-border collaboration, linkages and harmonization between capital markets in the region.
28. Orderly capital account liberalization will be promoted with adequate safeguards against volatility and systemic risks.
29. To expedite the process of financial services liberalization, ASEAN has agreed on a positive list modality and adopted milestones to facilitate negotiations.
30. Currency cooperation would involve exploration of possible currency arrangements, including an ASEAN currency payment system for trade in local goods in order to reduce the demand for US dollars and help promote stability of regional currencies, such as by settling intra-ASEAN trade using regional currencies.
Conclusion
31. Stability in the financial system is a precondition to maintaining the momentum of ASEAN economic integration. I have outlined above what ASEAN has been doing to contribute to such stability. In turn, the more ASEAN economies become integrated, the more feasible it is to adopt an ASEAN single currency, which is expected to reinforce even further stability and integration in Southeast Asia.
32. I look forward to your continued interest and support for this subject of great importance to our region in the years ahead.
