ASEAN ministers to tackle currency swap

Malaysian Prime Minister Mahathir Mohamad has rejected the participation of the IMF in the Asian currency swap arrangement

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HONG KONG, China (CNN) -- An anticipated global economic slowdown has prompted Southeast Asian finance ministers to discuss regional currency swap arrangements in a bid to safeguard their currencies.

Finance ministers of Association of Southeast Asian Nations (ASEAN)-member countries will gather in Kuala Lumpur this week to tackle an expanded web of currency swaps with China, Japan, and South Korea.

The Asian currency swap is a scheme which gives financial aid to member nations facing short-term liquidity needs in times of financial distress.

It is designed to safeguard against currency raids, similar to the one that brought on the 1997-98 regional crisis sparked by the devaluation of the Thai baht.

Southeast Asian currencies have already weakened in the recent weeks, dragged down by a frail yen, and ailing economic activity in the region brought by a U.S. slowdown.

The Malaysian ringgit was the only currency spared from the instability thanks to capital controls imposed in 1998.

Nonetheless, Malaysia was forced to cut its growth forecast last week to between 5 and 6 percent this year, from 7 percent, citing an expected sharp drop in manufacturing and exports.

Most analysts have also revised downwards their economic forecasts for ASEAN countries.

IMF refused

In a meeting in Chiang Mai last year, ASEAN finance ministers agreed to expand the ASEAN swap arrangement to include China, Japan and South Korea and to enlarge the facility to US$1 billion (S$1.8 billion).

But the agreement ran into an obstacle after Malaysia refused to give the International Monetary Fund (IMF) a key role in the arrangement as proposed by Japan.

Malaysian Prime Minister Mahathir Mohamad in November last year said most ASEAN countries were not keen to let the IMF oversee the swap arrangement.

In lieu of this, Japan sent Vice-Finance Minister Haruhiko Kuroda to Malaysia last month to meet Finance Minister Tun Daim Zainuddin to seek a solution to the disagreement.

Still, Daim stressed that Malaysia would strongly oppose the proposal to link the IMF to the currency swap.

"I think at this point, Malaysia does not see the need for a non-regional player to intervene," said Chin Loo, BNP Asian currency specialist.

"Malaysia is reluctant to allow the entry of non-regional players because between the Asian countries in the region," she said, adding that discussion on reserves is a very sensitive issue.

"You want to put a limit as to how much money can be tapped in your reserves," she said noting that the IMF's involvement could be awkward.

However, Japan, being one of the worst hit in the region during the Asian financial crisis, is coming from another angle.

Some analysts noted that Japan, being one of the biggest contributors to the IMF, would want the participation of the organization so it can steer some funds or impose policies in Japan's favor.

Nonetheless, Loo said the IMF's role, if it becomes involved would only be as a supervisor to provide objectivity in the arrangement.

'Peer review'

ASEAN finance ministers are also expected to review the terms of the scheme at their meeting this week.

The ministers are scheduled to conduct a "peer review'' on economic developments in the region, and hold dialogues with the Asian Development Bank and the US-ASEAN business council.

ASEAN deputy finance ministers will also hold a three-hour meeting with their counterparts from China, Japan and South Korea on Sunday afternoon.

Senior officials will be meeting on Wednesday, and finance and central bank deputies on Thursday and Friday to lay the groundwork for the two-day ministerial talks.

Asian Development Bank (ADB) - Fighting Poverty in Asia and the Pacific - ADB.org
Regional Currency Swap Arrangement: A Step towards Asian Monetary Fund?
IMF -- International Monetary Fund Home Page

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