1. Good morning ladies and gentlemen. It is an honor to be invited to participate in this T20 Policy Forum to share my views on the state of the international monetary system and its reform.
2. My remarks today will be on the evolving role of regional financial arrangements regional financial arrangements, focusing on the regional network (CMIM) and ASEAN+3 Macroeconomic Research Office (AMRO), after the Global Financial Crisis. I will also discuss the new challenges arising from the enhanced role of regional financial arrangements in relation to the global financial safety net.
3. Before I begin, I would like to state that the findings, interpretations, and conclusions expressed in my speech represent my personal views and are not necessarily those of the AMRO or its member authorities. Neither AMRO, nor its member authorities shall be held responsible for any consequence of the use of the information contained in my speech. The reason for me saying this is that our Office has not yet become an international organisation, and our capacity is thus limited. However, I am pleased to share that with the strong support of our members, our Office will obtain international organisation status next month (9 February 2016).
A Brave New World?
4. Needless to say, the Global Financial Crisis has had significant negative repercussions on the global economy. At the same time, it has also provided an excellent impetus and opportunity for change. This is especially true for the role of regional financial arrangements in the global financial architecture. I would like to briefly discuss three crucial changes.
5. First, in the case of the ASEAN+3 region, the Global Financial Crisis spurred regional authorities to enhance and strengthen its regional financial arrangement (CMIM). In 2009, ASEAN+3 reaffirmed its commitment to shift the network of bilateral currency swap agreements to 3 a single contractual agreement to simplify the activation process. This marked the evolution of the Chiang Mai Initiative (CMI) to the CMIM. In short, ASEAN+3 agreed to one single agreement, instead of a network of 16 bilateral swap agreements. ASEAN+3 also announced the establishment of an independent regional surveillance unit to monitor and analyze regional economies, and support the CMIM. This independent surveillance unit is AMRO, which was established in Singapore in April 2011.
6. Second, the Global Financial Crisis served as a turning point in redefining the relationship between the global and regional frameworks. A notable indication of this change is evident in the Troika system in Europe, and the IMF’s and G20’s endorsement of regional financial arrangements as part of the global financial safety net.
7. For example, in 2010, the IMFC communique underscored the importance for the IMF to cooperate with regional financial arrangements. In 2011, the G20 endorsed a set of principles for cooperation between the IMF and regional financial arrangements. In 2013, the IMF and G20 convened a seminar “Regional Financial Arrangements: RFA’s Role in International Financial Architecture and their Cooperation with the IMF” at the sidelines of the IMF and World Bank Spring Meetings. This marked a departure from the IMF’s earlier stance, when it took issue with the establishment of a strong regional initiative, possibly to preserve the centrality of the global financial framework.
8. The acknowledgement of the important role of regional financial arrangements to complement existing arrangements was documented in the 2013 St. Petersburg G20 Leaders’ Declaration. It recognized that “regional financial arrangements can play an important role in the existing global financial safety net”, and emphasized “the importance of cooperation while safeguarding the mandate and independence of the respective institutions”.
9. Third, the Global Financial Crisis underscored the need for changes in the governance system of the international monetary system. This resulted in 4 the recent adoption of the 2010 Quota and Governance reforms of the IMF.
The Road Ahead
10. While these changes represent a significant milestone in the first step towards reforming the international monetary system, it also brings about new challenges.
11. First, given the acknowledgement of the important role of regional financial arrangements in the global financial safety net, it is imperative to work out how the multiple layers of safety nets should coordinate and collaborate with each other, while avoiding moral hazard.
12. Second, there needs to be a certain common understanding on how surveillance should be coordinated at the regional and global levels. While multiple perspectives in surveillance can enhance the ability to identify sources of risks, inter-linkages and spillover effects, this heightened vigilance should go hand-in-hand with cooperation in the area of risk assessment. Also, sending out contradictory messages from different surveillance institutions might rouse unintended market reactions.
13. Finally – and this is specific to the ASEAN+3 region – the size and function of the CMIM (as well as AMRO) needs to be continuously enhanced to effectively safeguard regional financial stability. This is especially so, given the move towards integrating regional frameworks into the global financial architecture. I would like to suggest three ways to do so.
14. Currently, the CMIM has no permanent secretariat to ensure institutional memory. Instead, the secretariat role is taken up by the CoChairs of the ASEAN+3 process, which rotates annually within the ASEAN and the Plus 3 group. This creates a challenge in preserving institutional memory. CMIM members could consider entrusting this function to a certain organization, which comprise of a group of experts with sufficient professional knowledge and experiences in the area of the 5 CMIM, international monetary system, and other related fields. AMRO is willing to accept such a role if the CMIM members so decide.
15. Next, measures to enhance cooperation between the CMIM and the global financial safety net will need to be continuously explored. Here, I would like to draw your attention to one important feature of the recent Eurozone crisis. As you are aware, despite the establishment of the EFSF and ESM, the Eurozone still resorted to the global financial safety net (IMF). In my view, the reason for the Eurozone doing so was not because it lacked the financial resources or organizational capacity to solve the issue. Rather, it did so to obtain the global credibility needed to restore market confidence. It is thus important to distinguish between a crisis stemming from external shocks, and from within the region. If the former, a country or region may only require liquidity support, which can be obtained from the regional financial arrangement. However, if the crisis stems from within the region, large amounts of liquidity may be insufficient and external help would be required to help restore credibility as well.
16. Third, AMRO’s scope of business needs to be expanded. While great strides have been made to improve AMRO’s surveillance products since our establishment, there remains room for further improvement. I would like to emphasize the importance of accurate, timely and transparent data. Many of the world’s crises, including the Eurozone crisis, share the common trait of problematic data. In the case of the Eurozone, had there been accurate and correct data reporting, risks could have been detected earlier and the extent of the crisis could have been less severe. In our region, several member authorities have requested for AMRO’s assistance to improve their capacity for producing macroeconomic and financial statistics, in particular, BOP statistics. As part of our efforts to enhance the quality of our surveillance products, we aim to start providing technical assistance in the area of BOP statistics from this year.
17. As mentioned, the Global Financial Crisis has given impetus to policymakers to take steps to reform the international monetary system. 6 This is encouraging but also brings about new challenges that need to be addressed to safeguard global and regional financial stability. Nevertheless, I am confident that we are moving in the right direction, as recent developments suggest that the momentum for change will continue.
18. Before concluding, I would like to once again state that the findings, interpretations, and conclusions expressed in my speech represent my personal views and are not necessarily those of AMRO or its member authorities. Neither AMRO, nor its member authorities shall be held responsible for any consequence of the use of the information contained in my speech.