THE NOTION of having a single currency in the region to complement the Asean Economic Community (AEC) has been put to rest, at least for now. Instead, the clarion call is for Asean governments to focus on what is more important — economic integration.
For the longest time in Asean, there has been talk of a common currency. But the “death knell” came when the eurozone’s sovereign debt crisis in 2009 threatened to unravel the the economic bloc’s monetary union and its single currency — the euro.
In fact, economists note that what happened in the eurozone over the past several years provided the impetus for Asean member states to look at other means to ensure better intra-regional capital flows and protect the region from currency volatility.
There are benefits to be derived from a single currency in Asean. These include lower transaction costs, fewer foreign exchange risks (for example, no foreign exchange translation loss or gain) and greater price stability. The biggest argument against monetary union is the loss of control over monetary policy by the respective central banks.
So, can the full benefits of economic integration be felt without monetary union?
“It is absolutely possible without it,” Dr Nimnual Plewthongnam tells The Edge. He is the senior research fellow specialist at AEC and Legal Affairs at the E-Saan Centre for Business and Economic Research at Khon Kaen University in Thailand.
“If we aim for a currency union, the integration will be impossible. If one looks at the euro situation, one can see that having a currency union could create a huge complexity and challenges especially for Asean member states. There is no good reason for Asean to have a currency union, at least not for the next 10 to 15 years. It might not be the right answer at all for our relationships. Why do you need it when you can live without it?”
Indeed, the eurozone experience has shown that a currency union is put to test during financial upheavals, especially when member states do not have the same level of development. This economic and growth disparity is the weakest link in Europe’s monetary union.
In the eurozone, the economies of Spain, Portugal, Greece and Ireland are not as advanced as those of Germany, France, Italy and the Netherlands. Hence at the height of the sovereign debt crisis two years ago, there was real fear that the stronger economies would be dragged down by the weaker links in the union.
In the case of Asean, economists have pointed out that this disparity is even more stark. Basically, Asean members can be divided into two groups — the more developed Asean 5 and the newcomers known collectively as BCLMV (Brunei, Cambodia, Laos, Myanmar and Vietnam). The Asean 5 are Singapore, Malaysia, Thailand, the Philippines and Indonesia.
If we compare the pace of development in Singapore with that in Myanmar, for example, they are actually at the opposite ends of the spectrum. Singapore’s per capita, for one, is one of the highest in the world, while Myanmar’s is in the bottom.
In terms of size of the economy, a stark comparison can be made between Indonesia and Laos. Indonesia’s gross domestic product is 100 times the size of Laos — US$550 billion compared with US$5.6 billion, according to the statistics in a joint report by Bank Negara Malaysia and the Asian Development Bank on Asean’s road to financial integration.
Another reason a single currency will not work in Asean is the uncertainty if there will ever be complete mobility in labour and capital within member states.
A currency union is therefore not an option and this is clearly recognised by all the Asean members.
Instead, they have chosen to focus on collaboration and, to some extent, monetary policy cordination. In most cases, such collaboration and coordination involve Asean + 3, that is, with China, Japan and South Korea. Industry observers say this makes sense as the three are among Asean’s top trading partners and biggest sources of foreign direct investment (FDI).
One of the earliest collaboration efforts was the Chiang Mai Initiative (CMI), first announced in May 2000 in the wake of the 1997/98 Asian financial crisis. The objective was to fight off future currency crises.
The CMI in the initial stage comprised a network of bilateral currency swap arrangements among member countries, which enabled a crisis country to obtain US dollars (up to US$80 billion) or the currency of the supporting country at a certain exchange rate and for a certain period.
The CMI is linked to an International Monetary Fund programme to activate the swap lines. Without the IMF programme, only 10% of the assistance amount will be made available.
In 2010, the CMI was integrated into a multilateral agreement (known as the Chiang Mai Initiative Multilateralisation or CMIM), with common decision rules and conditions. Additionally, the total assistance amount was increased to US$120 billion. The portion outside the IMF programme was raised to 20%.
To strengthen regional surveillance, a regional research unit, Asean + 3 Macroeconomic Research Office, was set up in Singapore.
In July, the CMIM was further amended — the size of swap funds was doubled to US$240 billion and a “Precautionary Line” was introduced. Members contribute funds in proportion to their economic size, with a connected voting power in the organisation.
In a nutshell, the CMIM is aimed at fortifying members’ financial safety nets against balance of payments and liquidity problems.
Apart from the CMIM, individual bilateral currency swaps were introduced after the Asian financial crisis to reduce the impact of currency volatility. Such swaps, though, were mainly by China and Japan with its key trading partners to facilitate smoother flows of trade and investment.
Malaysia and China, for example, signed a currency swap agreement in 2009, which has since been extended. More recently, Bank Negara Malaysia signed a memorandum of understanding with the People’s Bank of China on the renminbi-clearing arrangements in Malaysia. Both central banks agreed to coordinate and cooperate on the supervision and oversight of the renminbi business, exchange of information, and to facilitate the continual improvement and development of the arrangement. — By Anna Taing
This article first appeared in The Edge Malaysia Weekly, on November 17 - 23, 2014.