Author: Beomhee Han, Group Head of CMIM Support Group
The chiefs in charge of finance and monetary authorities in East Asia gathered in early May this year in Fiji to discuss how to further strengthen the regional financing arrangement (RFA), called the Chiang Mai Initiative Multilateralisation (CMIM). Given the heightened risks in the global economy, including the escalating US-China trade tensions and financial market volatility, it is crucial to make the CMIM an efficient crisis-diffuser whenever the next one hits the region.
Since the Asian Financial Crisis of 1997-1998, ASEAN+3 members, comprising the 10 member states of ASEAN plus China (including Hong Kong, China), Japan and Korea, have made efforts to build and enhance the CMIM to protect themselves from such crises in future. With the total size of USD 240 billion, the CMIM is a multilateral currency swap arrangement among ASEAN+3 members which aims to address balance of payment and/or short-term USD liquidity difficulties in the region. Thanks to tireless efforts in the past years, today, the CMIM, with support from its macroeconomic surveillance arm – the ASEAN+3 Macroeconomic Research Office (AMRO) – is an important actor in the global financial safety net, along with countries’ own reserves, bilateral swap agreements between central banks, other RFAs, and the International Monetary Fund (IMF).
In a joint statement issued after the meeting in early May, ASEAN+3 finance ministers and central bank governors underscored several areas of progress that the CMIM has made recently.
First, based on the conclusion of the first five-year periodic review that reflect both members’ circumstances as well as recent global economic and financial developments, the ASEAN+3 members approved the amended CMIM Agreement, which is expected to come into force soon. The amendments aim to make a few financial terms of the CMIM, including supporting periods, flexible, add a legal basis for conditionality, and introduce an information-sharing process with the IMF, after getting signed by all members. As a follow-up measure, the CMIM Operational Guidelines will also be upgraded by the end of 2019.
Second, a number of principles were adopted to guide members and AMRO in implementing the CMIM conditionality framework. Conditionality works as part of the lender-borrower relationship when there is no collateral. Loans or swaps are dispersed over time in instalments, depending on reviews that determine whether conditions are being met. The current CMIM has a number of lending conditions in predetermined conditions precedent and covenants. However, there has been uncertainty around whether new conditions relating to policy adjustments can be attached to all CMIM facilities. Thus, the newly added legal basis for conditionality and a technical guidance of the CMIM conditionality that will be developed soon are necessary.
Third, AMRO, in supporting the CMIM, has enhanced the methodology for determining qualification for the CMIM crisis prevention facility. The analytical framework, known as the Economic Review and Policy Dialogue (ERPD) Matrix, consists of both quantitative and qualitative components for analysing the macro-financial fundamentals of a member economy. A member may request access to this facility if it wishes to strengthen its liquidity buffers against any vulnerability to financial crisis. The request would be approved by the CMIM decision-making body if the member meets the requisite qualification requirements, which would incorporate analyses done under the ERPD Matrix.
Fourth, ASEAN+3 members have adopted an information-sharing mechanism between the CMIM and the IMF, which was enhanced during the past joint test runs between the two parties. The next test run will be carried out in the second half of 2019, and AMRO will continue to play the role of a supporting agency to members. The upcoming test run is expected to further enhance operational readiness of the CMIM in providing crisis financing for members.
Lastly, ASEAN+3 members have drawn up a list of issues relating to the future direction of the CMIM with reference to other RFAs. During the first periodic review, ASEAN+3 members have raised many questions focused on how the CMIM can be improved. These include: Is there any alternative way to mobilize funds and provide financing to members in crisis? How can we reduce overreliance on the U.S. dollar and promote greater use of local currencies in trade and investments? Can we use local currencies for crisis financing? And can we introduce another facility for other financing needs in addition to short-term liquidity needs? These questions will be addressed from a mid-to long-term perspective. One key consideration is local currency contributions to the CMIM, which can provide more funding options for members. Considering the increasing regional financial linkages and the usage of local currencies in regional trade and investment, in 2018, AMRO conducted a collaborative research to examine the plausibility and possible modality of local currency contributions to the CMIM. Based on the research, members have drawn a general guidance on local currency contributions to the CMIM, which has been endorsed this May as the first meaningful outcome of discussions on future directions. This shows regional efforts and confidence to local currency usage in the region and sends a positive message to the market, although several technical issues are still to be resolved in this regard. ASEAN+3 will further discuss and prioritize all these issues at the coming meetings.
Constantly upgrading the CMIM is the only way to meet members’ evolving demand in terms of crisis financing and responding to the ever-changing global landscape. ASEAN+3 members have been fully aware of this and will continue pushing forward collective efforts to make steady progress.