FPRI’s Research for the Fiscal Policy Research Institute ASEAN+3 Research Group Draft Report

The Role of Regional Financial Safety Nets in the Global Architecture

Fiscal Policy Research Institute (FPRI), Thailand Contents

Page Introduction 3 1. Objectives of the study 4 2. Scope of the study 5 3. Conceptual framework of the study 7 4. Output 8

Chapter 1 Development of Regional Financial Safety Nets 9

Chapter 2 Current Regional Financial Safety Net Arrangements 13 2.1 Chiang Mai Initiatives Multilateralization (CMIM) 13 2.2 European Financial Assistance Mechanism 17 2.3 Arab Monetary Fund (AMF) 21 2.4 North American Framework Agreement (NAFA) 26 2.5 Latin American Reserve Fund (FLAR) 28

Chapter 3 Financial Safety Net Elements 31 3.1 Elements of regional funds/FSNs 31 3.1.1 Fund size 31 3.1.2 Speed of decision making 31 3.1.3 Linkage with the IMF 31 3.1.4 Surveillance and monitoring 32 3.2 FSNs characteristics and funding adequacy 35 3.3 Challenges for the development of regional FSNs 38

Chapter 4 An Analysis of CMIM Enhancement and Implementation 39 4.1 Policy measures to enhance FSNs’ efficiency, effectiveness, 39 complementarities and sustainability 4.2 A scenario analysis of an enhanced ASEAN+3 financial cooperation 41

Chapter 5 Conclusion 51 5.1 Measures that leverage on countries’ resource and financial markets 52 5.2 Measures that complement the global FSN and other regional FSNs 53

References 55

Fiscal Policy Research Institute (FPRI), Thailand 1 Table

Page Table 1.1: ASEAN+3 Total Reserves (includes gold) 9 Table 2.1: CMIM contributions, purchasing multiples and 16 voting-power distribution Table 2.2: EFSF Guarantee Commitment Contribution 19 Table 2.3: Funding for Greece, Ireland and Portugal assistance packages 20 Table 2.4: ESM’s shareholder contribution key 21 Table 2.5: AMF contributions, quotas and voting power distributions 25 Table 2.6: Available NAFA Funding 27 Table 2.7: FLAR lines of credit 30 Table 2.8: FLAR contributions, quotas, voting power, and key indicators 30 Table 3.1: FSNs Comparison 33 Table 3.2: Member Accessible Funds, Short-Term External Debt and 36 Foreign Reserves Table 3.3: Member Accessible Funds, Short-Term Debt and 37 Foreign Reserves (cont.) Table 4.1: External Debt-Imports Coverage 42 Table 4.2: Portfolio Liabilities-Imports Coverage 44 Table 4.3: CMIM External Debt-Imports Coverage 47 Table 4.4: CMIM Portfolio Liabilities-Imports Coverage 48

Figure

Page Figure 4.1: ASEAN Funding Adequacy 45

Fiscal Policy Research Institute (FPRI), Thailand 2 Introduction

Ten years since the Asian crisis in 1997-1998 and the Russian debt default in 1998, the global economy is in a period of uncertainty again as a result of another financial and economic crisis in 2008 that originated in the United States, spread through Europe and impacted Asia and the rest of the world. Since the global capital market became increasingly more liberalized and world economies became more integrated, financial crisis in a single economy, due to a balance of payment difficulty or a private or sovereign debt event, may have adverse consequences for both advanced and emerging/developing countries throughout the region and the rest of the world. There is an increasing need for financial safety nets (FSNs), institutional arrangements that can provide emergency funding for vulnerable countries in order to alleviate the impacts and prevent shocks from affecting “innocent bystanders.”

FSNs can be arranged at the national, regional or global level. At the national level, each country accumulates its own foreign reserves in order to self- insure against a sudden capital outflow. Large amounts reserves of Asian economies (US$ 4.9 trillion in 2010) (ADB, 2010), for example, came as a result of interventions to prevent the domestic currency from appreciating too much due to capital inflows. However it may be too costly in terms of the loss in value, due to the depreciation of the reserve currency, for a country to provide sufficient liquidity on its own for the purpose of crisis prevention. Regional FSNs help to leverage the reserve of the individual member countries in order to provide the needed liquidity more efficiently and effectively. A country can also manage to keep the amount of its short-term external debt at a low level in order to reduce its vulnerability.

Global crises often require global responses, however, and a global institution like the IMF provides a channel for which a substantial emergency loan package can be provided to the affected countries. The IMF’s Flexible Credit Line (FCL) and Precautionary and Liquidity Line (PLL) constitute a global FSN that aims to prevent countries from being affected by crises in advance. In addition, bilateral swap lines for currency exchanges with central banks of major economies are often setup at an early stage. Since these kinds of assistance may not be forthcoming or would require individual nation to comply with stringent conditions to ensure fund repayment and seem to portray the nation as being in deep trouble (stigma), a regional FSN provides an alternative where emergency funding may be more readily available and accessible.

Fiscal Policy Research Institute (FPRI), Thailand 3 As such, the establishment of an effective division of labor between FSNs should be pursued with the following principles in mind. First, to avoid moral hazard and enhance predictability, there should be a clear and measureable guidance about the criteria of crisis and accessibility of the facility. It should be readily known what conditions will allow access to the facility and the extent of resources available. And it must have sufficient capital to meet the countries’ financial need (provider for last resort). Also, it should be able to take preventive actions before a financial turbulence becomes more destructive (surveillance). Lastly, countries should have flexibility to use the facility both for addressing a balance of payments crisis and a budget deficit while minimizing the potential stigma effect.

In this connection, among the questions that have been raised rather often in the region is: what would be the best policy for an individual country to participate in regional FSNs? It seems that first best policy solutions from the “old playbook”-such as fiscal discipline and monetary policy focused on controlling inflation-although necessary, are no longer adequate. In order to address the adverse consequences from volatile capital flows and financial interconnections between economies, an effective regional FSN arrangement will be needed along with greater macro prudential regulation and stronger collaboration with national and global FSNs. Such issues are explored in this study from both theoretical and empirical perspectives. Relevant components are addressed in a brief and concise manner in order to derive policy implications for future applications.

1. Objectives of the study

The FPRI’s study on “The Role of Regional Financial Safety Nets in the Global Architecture” has the following objectives:

(1) To review and compare the available regional mechanisms (fund/FSN): Chiang Mai Initiatives Multi-lateralization, European Financial Assistance Mechanism, Arab Monetary Fund, North American Framework Agreement, FLAR, etc, (2) To review the elements of the regional funds or FSNs: Power/Size of the funds, Surveillance and monitoring, Speed of decision making, Certainty (voting formula, etc.), Linkage with the global FSNs, (3) To identify appropriate policy measures to enhance the effectiveness and complementarities of the regional FSNs.

Fiscal Policy Research Institute (FPRI), Thailand 4 2. Scope of the study

In order to achieve the above objectives of the research project, the scope of the study can be outlined as follows:

(1) The available regional mechanisms (funds/FSNs): Chiang Mai Initiatives Multi-lateralization, European Financial Assistance Mechanism, Arab Monetary Fund, North American Framework Agreement, FLAR

Review and compare the available regional mechanisms (funds/FSNs)

The study will discuss existing regional safety net arrangements, conducting a survey of the related literature and policy issues in the process. In this regard, we will determine the foundation and types of the arrangements, primarily focusing on the ASEAN+3 and subject to data availability. All in all, the purpose of this section will be to assess the extent of regional safety nets within the context of the recent financial crises.

(2) The elements of the regional funds or FSNs: power/size of the funds, surveillance and monitoring, speed of decision making, certainty (voting formula, etc.), linkages with the global FSNs

Review and analyze the elements of the regional mechanisms (funds/FSNs)

This section will integrate the key findings emerging from the previous section for an examination of the power/size of the funds, surveillance and monitoring, speed of decision making, certainty (voting formula, etc.) of the regional FSNs and linkages with the global FSNs. In addition, we will investigate the implementation and effectiveness of the FSNs. We will try to gain a more in-depth understanding of the regional issues and member-specific information in order to achieve the ultimate goal in strengthening surveillance and the effectiveness of FSNs.

(3) Policy measures to enhance the effectiveness and complementarities of the regional FSNs

Identify appropriate policy measures to enhance the effectiveness and complementarities of the regional the FSNs.

The regional financial safety net – the regional network of crisis financing instruments – can play a useful role in helping national authorities deal with unexpected capital flows that can be both massive and unfavourable in nature.

Fiscal Policy Research Institute (FPRI), Thailand 5 In the last decade, after the Asian financial crisis in late 1990s, the ASEAN+3 (China, Japan and Korea) countries made significant progress in financial cooperation by focusing on establishing regional liquidity support mechanisms, developing regional bond markets, and reinforcing economic review and policy dialogues. The development in ASEAN+3 financial cooperation has contributed a lot to the economic and financial stability and integration in the region. However, we are still facing arduous tasks and challenges in paving the way for enhanced stability and prosperity. It is important to further strengthen regional financial safety nets so that it can be effective in the new environment of the global economy. Integration of the regional financial markets still has a long way to go. Also, managing increased macroeconomic interdependence needs to be incorporated in the policy dialogue framework. Given the challenges ahead, it is desirable to explore the role of ASEAN+3 financial cooperation in enhancing economic and financial integration in a wider scope and a more ambitious manner.

In this light, we will identify appropriate policy measures to enhance the effectiveness and complementarities of the regional FSNs. Moreover, we will explore the issues of further strengthening the regional financial safety nets, working relationships between international and regional financing arrangements to increase the effectiveness of the regional FSNs. This section will recommend possible regional cooperation initiatives to best utilize the regional FSNs.

Fiscal Policy Research Institute (FPRI), Thailand 6 3. Conceptual framework of the study

The Role of Regional Financial Safety Nets in the Global Architecture

Policy measures to The available regional The elements of regional enhance the mechanisms (Funds/FSNs) funds or FSNs effectiveness and complementarities of the regional FSNs. Review existing regional 1. Examine the safety net arrangements power/size of fund, surveillance and monitoring, speed of 1. Identify appropriate Determine the decision making, policy measures to foundation and types of certainty (voting enhance the the arrangements formula, etc.) of effectiveness and regional FSNs and its complementarities linkage with global of the regional FSNs Assess the extent of FSNs. 2. Recommend measures to further regional safety net with 2. Investigate the implementation and strengthen the the recent financial crises effectiveness of the regional financial in so far as data are FSNs safety net, working available relationships between international and Describe more in -depth regional financing understanding of arrangements regional issues and 3. Discuss possible regional cooperation member-specific initiatives to best information in order to utilize regional FSNs. achieve the ultimate goal in strengthening surveillance and the effectiveness of FSNs.

Fiscal Policy Research Institute (FPRI), Thailand 7 4. Output

The main deliverables of the study cover:

(1) A comprehensive comparative analysis on the available regional mechanisms (fund/FSN). (2) A critical and detailed analysis of the elements of the regional funds or FSNs. (3) A list of policy recommendations that enhance the effectiveness and complementarities of the regional FSNs.

The rest of the study is therefore divided into the following chapters. Chapter 1 discusses the development of regional FSNs, their importance and their role in the global financial architecture. Chapter 2 provides an overview of existing regional FSNs in the context of regional specific characteristics and historical perspectives. Chapter 3 reviews and compares elements of regional funds/FSNs in order to derive an indication on the characteristics that influence the implementation and effectiveness of the FSNs. Chapter 4 provides policy recommendations that enhance FSNs’ efficiency, complementarities and sustainability in the context of ASEAN+3 financial cooperation based on issues discussed in the earlier chapters. A scenario analysis of the ASEAN+3 financial cooperation is also presented to demonstrate the likely benefits of an enhanced arrangement. Chapter 5 concludes.

Fiscal Policy Research Institute (FPRI), Thailand 8 Chapter 1 Development of Regional Financial Safety Nets

When a country faces a financial crisis such as a currency speculative attack or lack of confidence in its financial market leading to a capital flight, its first line of defense to cope with the external liquidity problem is its own international reserves. Thus, the international reserve held by monetary authorities is the most important national financial safety net (FSN) to avoid costly adjustment from external vulnerability of the economy. National FSN in this context is analogous to the lender of last resort facility provided by central banks. In order to determine the optimal national reserves size, many countries follow a simple rule of thumb. The rules states that the countries should maintain the reserves level equivalent to: (1) 3 months of import; (2) 5 to 20 percent of money supply (M2); and (3) the value of all debt obligations due in 12 months (Dominguez, Hashimoto, & Ito, 2011).

National reserves are likely to concentrate in countries that are less likely to suffer short-term balance of payment crisis. In the case of Asian countries, after suffering the Asian financial crisis in 1997, national reserves have been increasing rapidly. From 1990 to 2010 total reserves (including gold) for ASEAN+3 countries have increased from $US 226 billion to $US 5.25 trillion with a sharply rising upward trend since 2000. This results in an increase in the region’s reserves-to- GDP ratio from 54.5% to 90.6% over the period.

Table 1.1: ASEAN+3 Total Reserves (includes gold)

US$ Trillion 6

5

4

3

2

1

0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: World Bank

Fiscal Policy Research Institute (FPRI), Thailand 9 If a balance of payment problem of one country spreads into other countries and becomes a contagion, there may be a need for help from international organization. The most well-known institution responding to the development and stability of the global economy and financial market is the International Monetary Fund (IMF). As an international lender of last resort with quota-based resources and borrowings from member countries to finance its operations, the IMF currently provides three broad categories of lending facilities: 1) the traditional Stand-By Arrangements (SBA) with program targets (conditionality) to address short-term balance of payment problems that may also be provided on a precautionary basis; 2) pre-arranged precautionary lending facilities such as the Flexible Credit Line (FCL) and Precautionary and Liquidity Line (PLL) that can be provided anytime within a pre-specified window based on a set of qualification criteria and more focus conditionality which does not require as large economic adjustment as under the SBA; 3) the Rapid Financing Instrument (RFI) which provides emergency balance of payment assistance with limited conditionality for countries affected by exogenous shocks such as commodity price shocks, natural disasters, post-conflict situations and emergencies resulting from fragility; and 4) Longer-term arrangement such as the Extended Fund Facility (EFF) for long-term balance of payment problem, usually over a period of 3 years. There are also more flexible concessional facilities available for low-income countries with more generous financing terms that are counterparts to the main facilities mentioned such as the Standby Credit Facility (SCF), the Rapid Credit Facility (RCF) and the Extended Credit Facility (ECF).

The FCL provides access to IMF’s resource for countries that have very sound economic and financial policies without being subjected to traditional conditionality. In 2010, IMF made a revision, doubling the FCL period from one year to two years and also removing the implicit cap of 1,000% quota. Another IMF’s more flexible tool is the Precautionary and Liquidity Line (PLL) which was recently developed from the Precautionary Credit Line (PCL). The PLL provides financing for balance of payment needs of member countries that have weaker economic foundation compared to the FCL-eligible countries. The PLL arrangements have either six month or 1-2 year durations. The six-month PLL provides up to 250 percent of a member country’s quota for those with actual or potential short-term balance of payment needs. However, the country can ask for 500% of the quota in an exceptional circumstance where the need increases from exogenous shocks. For 1-2 year PPL arrangement, the maximum access to IMF facility is 500 percent of the quota for the first year, and 1,000 percent of the quota in the second year. If a member country does not fall into these two categories, or the FCL and PLL quotas have been used up, the member country has to ask for a conventional lending facility of which the tightly conditionality is required.

Fiscal Policy Research Institute (FPRI), Thailand 10 In a broad sense, global financial safety net is a network of crisis financing such as insurance and loan instruments from multilateral institutions like the IMF, regional financial arrangements, and individual countries for the affected countries to cope with volatility and contagion (Goretti & Joshi, 2010). Global FSN aims to prevent crisis that may spillover from core crisis countries to the innocent bystanders, the countries that have strong fundamental and policies but may be vulnerable to contagion. Global FSN also prevent foreign exchange reserves from being unevenly distributed, reducing the need for emerging economies to accumulate large amount of reserves. In addition to the IMF, global FSN includes a network of swap arrangements between central banks with high level of international liquidity and those with limited access. Major providers of the swap lines are the US Federal Reserve (the Fed, which recently extended its arrangement with global central banks to provide U.S. dollar liquidity and other major foreign currencies), the People Bank of China (the PBOC, which has made several yuan- denominated swap arrangements with China’s trade partners), and the European Central Bank (ECB, which is the Fed’s biggest swap party and extends swap lines to EU member countries). The most well-known agreement is the US$30 billion agreements in 2008 between the Federal Reserve and central banks of four systemically important emerging economies with strong fundamentals – Brazil, Mexico, Korea and Singapore that stabilized markets’ reaction during the global crisis (Aizenman, Jinjarak, & Park, 2010). Still, in the event of a financial crisis, the only outside aid available for most other countries normally comes from the IMF. However, financial help from the IMF has several limitations such as the stigma problem, strict conditions for the borrowers, and the standard solution that may not work for all regions. Also, the fact that the IMF has a large number of member countries to cover decreases its flexibility and speed of decision making. It takes time to gather support from member countries, in order to expand the IMF’s fund size, for example. For program funding, it takes time to finalize the arrangement and to tailor specific conditionality for the country concerned. Therefore, regional financial safety nets have developed as the second line of defense for crisis prevention in addition to the global FSN in order to respond to the regional specific needs.

Regional FSN is a co-financing arrangement among a group of countries within a particular region to provide balance of payment crisis funding to the affected members through pooling of contributed or borrowed reserves or through the swap of financial assets (usually foreign exchange reserves) (McKay, Volz, & Wölfinger, 2010). Regional FSN has two principal advantages (Truman, 2011). Reserve pooling reduces the real resource cost of accumulating reserves from running large current account surpluses. Reserve pooling via regional FSN also economizes the net financial cost of holding reserves. There are various Regional FSNs which were originated in different regions. In the following chapter, we explore the Arab Monetary Fund (AMF), North American Framework Agreement (NAFA), Latin America Reserve Fund (FLAR), European Financial Assistance Mechanism (EFSM), and Chiang Mai Initiatives Multilateralization (CMIM).

Fiscal Policy Research Institute (FPRI), Thailand 11 Each Regional FSN has a different structure and purpose based on the characteristics of countries in the region. The CMIM, for example, is a US$120 billion short-term multilateral swap agreement among 10 ASEAN countries and China, Hong Kong, Japan and Korea, that was established to help member countries experiencing short-term liquidity shortage. The CMIM network of swap arrangements enables the big plus three countries that have strong economic foundation to provide enough liquidity assistance in order to prevent a crisis from affecting an innocent bystander. CMIM has a unique funding structure that allows small countries to access higher quota as a percentage of their contribution. Other regional FSNs which are the AMF, FLAR, NAFA, and EFSF, each have different structures and purposes but share a common characteristic – they were established by countries with relatively similar culture and needs in order to ensure stable economic and financial development in their respective region.

Fiscal Policy Research Institute (FPRI), Thailand 12 Chapter 2 Current Regional Financial Safety Net Arrangements

This chapter reviews various regional financial safe net arrangements, namely the Chiang Mai Initiatives Multilateralization (CMIM), European Financial Assistance Mechanism (EFSM), Arab Monetary Fund (AMF), North American Framework Agreement (NAFA), and Latin America Reserve Fund (FLAR). Each of these arrangements has its own different foundation, structure and purpose based on the characteristics of countries in the region. In addition to outlining their regional characteristics, their particular responses to the recent financial crises are highlighted.

2.1 Chiang Mai Initiatives Multilateralization (CMIM)

The Chiang Mai Initiative (CMI) was initiated at the ASEAN+3 Finance Ministers’ Meeting in May 2000. The idea was originated in 1997 following the Asian financial crisis after the proposal for the establishment of the Asian Monetary Fund (AMF) has been dropped. The IMF and United States were concerned that the AMF will duplicate the function of the IMF and create moral hazard by allowing East Asian countries to bypass the tough conditionality aimed at correcting balance of payment problem. As a result, an alternative regional cooperation framework (the Manila Framework) which involved the role of the IMF was adopted instead. This cooperation framework eventually led to the establishment of the CMI in 2000 that consisted of an expansion of currency swap facilities among ASEAN member countries (the ASEAN Swap Arrangement, ASA) and bilateral swap arrangements (BSA) with the Plus Three members (China, Japan and Korea) (Sussangkarn, 2010). The CMI was formed during the period when Asia’s foreign reserves were growing rapidly. In 2000, the reserve of Japan and China was US$ 305 and US$ 157 billion respectively. As a result of their current account surpluses, many countries in Asia have accumulated large amounts of foreign reserves. The establishment of Chiang Mai Initiative Multilateralization (CMIM) in March 2010, which effectively pools a portion of the region’s foreign reserves through a network of 90-day swap facilities among the member countries to provide U.S. dollars liquidity, caught global attention since the pool of reserves was as large as US$120 billion and the agreement has high potential for further development. By 2010, the reserves of China and Japan grew to US$ 2.8 trillion and US$ 1.1 trillion. The current CMIM commitments by China and Japan, as shown in Table 2.1, account for around 2% of the combined reserves in 2010.

Fiscal Policy Research Institute (FPRI), Thailand 13 The CMI agreement was the collaboration of China, Japan, South Korea, and 10 ASEAN countries to cooperate in four objectives – monitoring capital flows, regional surveillance, swap networks, and training personnel. Firstly, since the crisis in 1997-1998 was blamed to originated from fluctuation of capital flows, finance ministers and central bank officials agreed on the ASEAN+3 framework to monitor the capital flow. Secondly, they agreed to establish a network of contact persons to facilitate regional surveillance to enhance the effectiveness of their economic reviews and policy dialogue. Thus the objective is “to establish a well- coordinated economic and financial monitoring system in East Asia.” Thirdly, the regional financing arrangement was established to complement but not substitute the existing IMF arrangement. The facilities involve an ASEAN Swap Arrangement (ASA) among ASEAN countries, a bilateral swap network, and a repurchase agreement among ASEAN+3 countries. Fourthly, they agreed to establish the research and training networks to strengthen the human capital in financial, banking, and related areas, which are initially supported by China, Japan, and South Korea.

In December 2001, the CMI became operational with the size of US$ 25 billion. It has been expanding for three times, and finally reaching US$ 120 billion in 2010 when the CMIM was established. Funding for the CMIM comes from ASEAN+3 member countries – 80 percent from the Plus Three countries (China, Japan, and South Korea), and 20 percent from 10 ASEAN countries. Voting power is well-distributed in order to prevent any country from having veto power. Voting formula comprises of basic votes and votes based on contribution. Each country except Hong Kong has 1.6 points of basic vote, and earns additional 1 point for every US$ 1 billion contribution. Borrowing quotas depend on members’ contribution and the purchasing multiples – 0.5 for China and Korea, 2.5 for Hong Kong and big five ASEAN countries, and 5 for smaller ASEAN countries. From the contribution, borrowing quotas, and voting formula shown in Table 2.1, the Plus Three countries are the main contributors of resource to help the ten ASEAN countries. Although quotas are well aligned using the purchasing multiples, 80 percent of the lending (the IMF linked portion) is conditional on the borrowing country entering an IMF program. The result is that the big five ASEAN countries including Indonesia, Malaysia, Singapore, Thailand and Philippines, each contributing US$ 4.6 billion to the CMIM, can borrow US$ 2.3 billion from the CMIM without going to the IMF, and the remaining of the total quota of US$ 11.4 billion is only available after an arrangement with the IMF is made. For the smaller ASEAN members, including Vietnam, Cambodia, Myanmar, Brunei and Lao PDR, each country can only borrow up to the amount of their contribution without seeking the IMF’s assistance.

Fiscal Policy Research Institute (FPRI), Thailand 14 There are two types of decision making in CMIM. A consensus from the Ministerial Level Decision Making Body (MLDMB), consisting of ASEAN+3 finance ministers, is used for general fundamental issues such as the total size of CMIM, member’s contribution, quotas, voting rights, conditionality, membership entrance, etc. A two-third majority ruling by the Executive Level Decision Making Body (ELDMB), consisting of deputy-level representatives of the ASEAN+3 finance ministries and central banks, based on countries voting rights is used for lending related activities (such as initial execution of drawing, drawing renewal, exemptions, events of default, etc).

Since CMIM lending facilities have never been activated, the consideration for speed of decision making is based on the procedural structure that would come into effect when a member country applies for the credit line. The requesting country makes contacts with the two countries appointed to coordinate the activation process (one from the ASEAN member countries and another from the Plus Three countries) that will inform other members within two days of the request and call for an ELDMB meeting which should reach a decision within 1-2 weeks. The speed of decision making depends on whether or not the IMF-linked portion is required. If the lending activity requires only the 20 percent IMF-delinked portion, the activation process is finished once the borrowing country reaches an agreement with the CMIM. If the lending is granted, currency swaps should take place within two weeks after ELDMB’s approval. However, if the 80% IMF-linked portion is included, the decision making is prolonged until the member country reaches an agreement with the IMF. For the monitoring purpose, at the Tashkent meeting in May 2010, the ASEAN+3 finance minister agreed to create the ASEAN+3 Macroeconomic Surveillance Office (AMRO) located in Singapore as an independent regional surveillance unit. AMRO was subsequently established in April 2011. Its ability to access information in ASEAN+3 countries also plays an important role in the speed of decision making.

Fiscal Policy Research Institute (FPRI), Thailand 15 Table 2.1: CMIM contributions, purchasing multiples and voting-power distribution

Purchasing IMF Linked IMF De-Linked Votes based on Financial Contribution Basic votes Total voting power Multiple Portion Portion contribution US$ (billion) % US$ (billion)US$ (billion) (no. of vote) (no. of vote) (no. of vote) (%) China (Excluding 34.20 28.50 0.5 17.1 3.42 1.6 34.20 35.80 25.43 China Hong Kong, China) Hong Kong, China 4.20 3.50 2.5 - 2.1 0 4.20 4.20 2. 98 Japan 38.40 32.00 0.5 19.2 3.84 1.6 38.40 40.00 28.41

Korea 19.20 16.00 1 19.2 3.84 1.6 19.20 20.80 14.77

Plus 3 96.00 80.00 55.50 13.20 4.80 96.00 100.80 71.59

Indonesia 4.552 3.79 2.5 11.38 2.276 1.6 4.552 6.152 4.369

Thailand 4.552 3.79 2.5 11.38 2.276 1.6 4.552 6.152 4.369

Malaysia 4.552 3.79 2.5 11.38 2.276 1.6 4.552 6.152 4.369

Singapore 4.552 3.79 2.5 11.38 2.276 1.6 4.552 6.152 4.369

Philippines 4.552 3.79 2.5 11.38 2.276 1.6 4.552 6.152 4.369

Vietnam 1.00 0.83 5 5 1 1.6 1.00 2.60 1.847

Cambodia 0.12 0.10 5 0.6 0.12 1.6 0.12 1.72 1.222

Myanmar 0.06 0.05 5 0.3 0.06 1.6 0.06 1.66 1.179

Brunei 0.03 0.03 5 0.15 0.03 1.6 0.03 1.63 1.158

Lao PDR 0.03 0.03 5 0.15 0.03 1.6 0.03 1.63 1.158

ASEAN 24.00 20.00 63.10 12.62 16.00 24.00 40.00 28.41

Total 120.00 100.00 118.60 25.82 20.80 120.00 140.80 100.00

Source: Attachment to the Joint Ministerial Statement of the 13th ASEAN+3 Finance Ministers' Meeting Tashkent, Uzbekistan, 2 May 2010

Fiscal Policy Research Institute (FPRI), Thailand 16 2.2 European Financial Assistance Mechanism

Financial assistance for European Union (EU) countries 1 consists of lending facilities from the Balance-of-Payments (BoP) Assistance Facility (formerly the Medium- Term Financial Assistance facility – MTFA), the European Financial Stabilization Mechanism (EFSM) and the European Financial Stability Facility (EFSF). The EFSF is available to the Eurozone member countries that share the single Euro currency while the BoP assistance facility is available to European countries outside the Eurozone. The EFSM, on the other hand, is available to all EU countries.

The BoP assistance facility provides non-Eurozone members experiencing balance of payment difficulties with loans, raised in the financial markets by the European Commission (EC) on behalf of the EU, of up to the maximum amount of €50 billion. The fund limit has been raised in recent years from previously €25 billion before May 2009 and €12 billion prior to December 2008. The facility was introduced on 18 February 2002 and replaced the Medium-Term Financial Assistance which was available for all EU member countries prior to the introduction of the euro currency in 1999. 2 Since the default risk of the loans is ultimately borne by the EU member states, the BoP assistance facility carries conditions much like the IMF assistance. And even though the facility can be provided independently by the EU, joint programs with the IMF are often provided. The assistance requires the country in need of funding to provide the European Economic and Financial Affairs (Ecofin) Council and other member states with a draft adjustment programme designed to achieve a sustainable balance of payments position. The Council makes an approval and decides on the loan amount, average duration (normally about five years) and loan terms based on the recommendation of the Commission. Economic policy conditions to ensure loan repayment are described in the Memorandum of Understanding (MoU) and loan agreement. The conditions are subject to regular reviews and verification by the Commission, in collaboration with the Economic and Financial Committee and other programme partners including the IMF, prior to a decision on the release of any further instalment. Modifications and amendments to the previously adopted documents are possible given changing economic circumstances. The borrowing country is also subject to post-programme surveillance once the programme has ended. Recent BoP assistance programs include a €20 billion assistance package for Hungary in December 2008 of which €6.5 billion was provided by the EU, a €7.5 billion assistance package for Latvia in December 2008 (€3.1 billion from the EU), a €20 billion assistance package for Romania in May 2009 (€5 billion from the EU) and a further precautionary support of €5 billion for Romania in May 2011 (€1.4 billion from the EU). All of these programmes involve the participation of the World Bank and the IMF. By the end of 2011, Latvia has

1 As of the end of 2011, members of the EU in the Eurozone include Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovak Republic, Slovenia and Spain. Non- Eurozone members include Bulgaria, Czech Republic, Denmark, Latvia, Lithuania, Hungary, Poland, Romania, Sweden and the United Kingdom. 2 The MTFA itself was established in 1971 and combined with another facility, the 1975 Community loan mechanism, in 1988.

Fiscal Policy Research Institute (FPRI), Thailand 17 recovered from the financial and economic crisis of 2008 and undergoes post- programme surveillance. Hungary, on the other hand, has indicated in November 2011 of possible further need for a precautionary assistance from the EU and IMF.

The European Financial Stabilization Mechanism (EFSM) established on May 10, 2010 is similar to the BoP assistance facility but available to all of EU member states experiencing or seriously threatened with a severe financial disturbance due to events beyond member states’ control. Funding comes through loans raised in the financial markets by the European Council of up to the maximum amount of €60 billion under an implicit EU budget guarantee. Like the BoP assistance facility, the EFSM is often provided as a package in conjunction with the IMF and also the European Financial Stability Facility (EFSF – see below) in the case of Eurozone countries. The country in need of funding has to submit an assessment of its financial needs and an economic and financial adjustment program for approval by the Council according to the EC’s proposal. The general economic policy conditions that the country has to follow are stated in the MoU with the EC and are subject to review by the EC in collaboration with the European Central Bank (ECB). If presented as a package, the policy conditions will be in line with those required by other participating lending institution such as the IMF framework of performance criteria and structural benchmarks. The EFSM is subject to review by the EC every six months. Recent activation of the EFSM includes the loans to Ireland (€22.5 billion for the December 2010 package) and Portugal (€26 billion for the May 2011 package). Both are in conjunction with the IMF and EFSF assistance totaling €85 billion for Ireland and €78 billion for Portugal. The EFSM commitments to Ireland and Portugal are already a sizeable sum (€24 billion already raised by October 2011) compared with its aggregate loan limit of €60 billion thus restrict the amount of funds available for other countries.

The European Financial Stability Facility (EFSF) was established on June 7, 2010 as a temporary institution to provide financial assistance to Eurozone countries prior to the creation of the permanent European Stability Mechanism (ESM), an intergovernmental organization for crisis resolution scheduled for July 2012. The EFSF total lending capacity of €440 billion is financed through bonds and other debt instruments issued in the private capital market. The issues are guaranteed by Eurozone members on a pro rata basis, in accordance with their share in the paid-up capital of the ECB. Member guarantees as shown in Table 2.2 totaling €726 billion (€780 billion prior to the stepping out of Greece, Ireland and Portugal) are used to support a credit enhancement structure of up to 165% over collateralization for the principal and interest payment in order to secure an AAA credit rating. The total guarantee commitment was raised from the previous amount of €440 billion in July 2011. Greece, Ireland and Portugal that are receiving crisis assistance packages are withdrawn from providing guarantee commitments.

Fiscal Policy Research Institute (FPRI), Thailand 18 Table 2.2: EFSF Guarantee Commitment Contribution

Units: € million Members Guarantee Commitments Contribution Key (%) Austria 21,639 2.99 Belgium 27,032 3.72 Cyprus 1,526 0.21 Estonia 1,995 0.27 Finland 13,974 1.92 France 158,488 21.83 Germany 211,046 29.07 Greece - - Ireland - - Italy 139,268 19.18 Luxembourg 1,947 0.27 Malta 704 0.10 Netherlands 44,446 6.12 Portugal - 0.00 Slovakia 7,728 1.06 Slovenia 3,664 0.51 Spain 92,544 12.75 Total 726,000 100 Source: EFSF as of December 2011

The EFSF has a certain degree of flexibility with regards to the currency and other aspects of its funding instruments. It is also allowed to finance recapitalization of financial institutions through loans to member governments (including countries that are not receiving direct program assistance) and intervene in the secondary markets based on the analysis of the ECB under exceptional financial market circumstances and risks to financial stability and on the basis of a decision by mutual agreement of the EFSF/EFSM member states to avoid contagion. The Eurozone member state in need of EFSF funding makes formal request to other members and negotiates a stabilization program with the EC subject to strong conditionality and surveillance in cooperation with the IMF and the ECB. A precautionary program is also available with 1-year renewable credit lines provided in conjunction with those by the IMF. Key decisions such as loan approval and disbursement require unanimity from Eurozone member states. Member countries’ representatives in the board of directors hold the number of votes proportional to their EFSF contribution shares. The EFSF’s participation in current crisis programs includes those of Ireland and Portugal as shown in Table 2.3. Greece’s assistance package was arranged prior to the EFSF on May 2, 2010 and included loans from the Eurozone member states as well as contributions from non-Eurozone members through the IMF. By the end of 2011, Greece also secured additional financing which included private sector involvement (PSI) in the form of a debt exchange with private financial institution in order to reduce its

Fiscal Policy Research Institute (FPRI), Thailand 19 private sector liability, in addition to an official program financing of up to €130 billion until 2014 that has been finalized in February 2012. The expansion of the EFSF lending capacity through the use of leverage instruments (credit enhancement to primary bonds issued by a member state or co-investment funds) was also approved in October 2011.

Table 2.3: Funding for Greece, Ireland and Portugal assistance packages

Country € billion Greece (May 2010) 110 Euro area member states loans 80 IMF - Quota resources (Members' currencies) 15 - Bilateral loans and note purchase agreements 15 Ireland (December 2010) 67.5 IMF 22.5 EFSM 22.5 EFSF 17.7 Bilateral loans from - UK 3.8 - Denmark 0.4 - Sweden 0.6 Portugal (May 2011) 78 IMF 26 EFSM 26 EFSF 26 Source: IMF, EFSF

The EFSF is supposed to be a predecessor to the European Stability Mechanism (ESM), an intergovernmental organization for crisis resolution under public international law scheduled for July 2012. The ESM Board of Governors consist of Finance Ministers of the Eurozone member states as voting members, and the European Commissioner for Economic and Monetary Affairs and the ECB President as observers. The Board of Governors appoints a managing director who chairs the Board of Directors nominated by each Eurozone country. With an effective lending capacity of €500 billion 3, the total subscribed capital for the ESM will be €700 billion (€80 billion in members’ paid-in capital and €620 billion callable capital) with members’ contribution based on the ECB contribution key as shown in Table 2.4. Member states with a GDP per capita below 75% of the EU average will enjoy a temporary reduction in their contribution for 12 years after their Eurozone entry. Lending approval is made by ESM’s Board of Directors after an assessment by the EC and ECB (along with the IMF wherever appropriate and possible) on the risk to the financial stability of the Euro Area as a whole, public

3 To be assessed by EU Head of Government and State in March 2012

Fiscal Policy Research Institute (FPRI), Thailand 20 debt sustainability and the actual financing needs of the requesting member. The ESM treaty signed by all Euro Area Member States on February 2, 2012 allowed an emergency voting procedure requiring a qualified majority of 85% of the votes cast for lending approval. A request by the borrowing member for financial assistance from the IMF is also expected. Participation of non-Euro Area Member States to provide assistance to Euro Area Members is allowed on an ad hoc basis.

Table 2.4: ESM’s shareholder contribution key

Members Contribution Key (%) Austria 2.783 Belgium 3.477 Cyprus 0.196 Estonia 0.186 Finland 1.797 France 20.386 Germany 27.146 Greece 2.817 Ireland 1.592 Italy 17.914 Luxembourg 0.250 Malta 0.073 Netherlands 5.717 Portugal 2.509 Slovakia 0.824 Slovenia 0.428 Spain 11.904 Total 100 Source: EFSF as of December 2011

2.3 Arab Monetary Fund (AMF)

The Arab Monetary Fund (AMF) was established on April 27, 1976 at Rabat, Morocco, and started operations as the AMF Agreement went into effect on February 13, 1977. The AMF has 22 member countries with the agreement equivalent to 600 million Arab Accounting Dinars (AAD) (SDR 1.8 billion or roughly US$ 2.8 billion) in authorized capital. The fund was founded as a result of soaring oil price in the early 1970’s. Majority of the member countries are among the most prosperous oil and gas producers. They created the AMF from oil sales in order to provide low-interest-rate loans for the less prosperous Arab countries who are net energy importers. The combination of the AMF member countries (listed in Table 2.5) implies that the majority will not face the balance of payment deficits, thus help promoting the economic confidence among Arab countries. Therefore, the fund has been operating independently without any supplementary fund from other regional funds or the IMF, and thus is not subject to any IMF conditionality.

Fiscal Policy Research Institute (FPRI), Thailand 21 According to the AMF Agreement, the fund aims at contributing to the achievement of the following objectives: (a) correcting disequilibria in the balances of payments of member states; (b) promoting the stability of exchange rates among Arab currencies, and striving for the removal of restrictions on current payments between member states; (c) establishing policies of Arab monetary cooperation to speed the process of economic development in the member states; (d) promoting the growth in the investment of member states’ financial resources in foreign markets; (e) promoting the development of Arab financial markets; (f) promoting the Arab dinar and paving the way for the creation of a unified Arab currency; (g) coordinating member states in dealing with international monetary and economic issues; (h) settling current payments between member states in order to promote trade among them.

AMF facilities, as shown in Table 2.5, fall within two categories. The first category was introduced since the establishment of the fund in 1978 to assist eligible members to finance their balance of payment deficits. The provision of facilities includes consultation and agreement on the adjustment of macroeconomic framework of the concerned country. Four types of loans are available in this category varying in sizes, terms, and maturities according to the different balance of payment situation. The first is Automatic Loan, of which 75% of borrowing countries’ subscription to the fund capital is granted in convertible currency. It has three year maturity and does not subject to any condition of an economic reform program. The second type is Ordinary Loan which helps the borrowing country extending the loan amount for 100% of its subscription to the fund. Combining Ordinary Loan with Automatic Loan, the loan size expands to 175% of the subscription fund. The Ordinary Loan borrowing country must agree with the stabilization program for not less than one year period in order to reduce its balance of payment deficit. Loan disbursement is subject to the successful implementation of economic policies and measures agreed upon. Each disbursement is repaid within five years in four equal half-yearly installments following a grace period of three and a half years. The third type of loan is Extended Loan which provides additional loan for the country with a sizable and chronic balance of payment deficit. The maximum size of the loan is 175% the size of the subscription fund. When combined with Automatic Loan, the loan size becomes 250% of the subscription fund. The loan disbursement is subject to the successful implementation of policies and measures agreed upon. Each disbursement is repaid within seven years in four equal half-yearly installments following a grace period of forty-two months. The fourth type of loan is Compensatory Loan, extended to assist a member country experiencing short fall in export earnings and/or an increase in the value of agricultural imports. The loan size is equivalent to 50% of the subscription fund. The maturity is three years and is repayable in four half-yearly installments following a grace period of 18 months.

Fiscal Policy Research Institute (FPRI), Thailand 22 The second category, the Structural Adjustment Facility (SAF), was introduced in 1997. This facility aims to back structural reforms at a sectoral level which is currently limited to the financial sector. Each disbursement of the SAF is repaid in four years, and the borrowing country must agree on the financial sector reform program monitored by the Fund. In 1997 the limit of the loan was initially set at 75 % of the subscription; however, as demand increased, the limit was raised to 175% in 2001. Combining the 175% limit of the SAF with the 250% limit of the loans for balance of payment deficit, the maximum size of loan available for each member country is 425% of the subscription fund. Furthermore, if the country is eligible for the Compensation Loan, the ceiling of the loan becomes 475% of the subscription capital paid in convertible currencies.

Voting formula comprises of basic votes and votes based on contributions. For basic votes, each member has 75 votes regardless of the number of shares it holds. For voting from contribution part, each county earns 1 vote for each share it has (1 share equals to AAD 50,000 or roughly US$ 231,000). It is worth to note that, from Table 2.5, the combination of Saudi Arabia (13.58%), Algeria (11.96%), and Iraq (11.96%) are 37.5% of the total voting power. Thus, three out of 22 member countries hold one-third of the voting rights. The speed of decision making varies between types of lending agreement. The fastest type is the Automatic Loan of which the fund automatically grants 75 percent of the capital by the member country. The country begins the process by writing the letter to the fund, a quick internal report is prepared and management takes the decision, with later notification to the Board. The other two main types, the Ordinary Loan and the Extended Loan, follow a slightly different step. The country begins by sending the mission to AMF, a program is devised, a letter of intention produced by the authorities is submitted to the Board for consideration. The process takes between 1 to 6 weeks as a rule. The three types of loans provide swift action in the event of balance of payment shortage.

Originally the AMF was considered a complementary rather than a major source of financing for balance of payment deficits with the subscribed and called up capital of AAD 326 million. As the demand from member countries increase, the subscribed capital was later raised to AAD 600 million. As of December 2010, the paid-up capital of the fund was AAD 596 million, roughly US$ 2.8 billion. Until the end of 2010 the AMF made 150 loans worth US$ 6.2 billion benefiting 14 countries. In 2010 the fund extended 4 new loans worth AAD 118 million (US$ 545.2 million) which is the highest lending activity in the last 22 years. These include two SAF loans worth AAD 17.2 and AAD 47.9 million for Jordan and Morocco respectively, one compensatory loan worth AAD 9.8 million for Jordan, and one extended loan worth AAD 43 million for Yemen. The balance of outstanding loan amounted to AAD 356.6 million (US$ 1.65 billion) as of the end of 2010.

Fiscal Policy Research Institute (FPRI), Thailand 23 AMF is the agreement solely among Arab countries, so the role of the fund is limited by the structure of its members. First, the Arab countries have a great diversity in economic regimes that coexist with political differences and conflicts. Some countries are agricultural producers (e.g., Mauritania and Sudan) while others are oil producers. Some have liberal trade and exchange regime (e.g., the GCC countries) while most of the countries have more restrictive regimes. There are seven different currencies and exchange rate arrangements that vary from freely floating exchange rate, managed floating, and a peg to the US dollar. Differences in gross national income per capita vary across the region, ranging from low income to high income countries. According to World Bank list of economies in November 2011, two low income countries are Somalia and Comoros (less than US$ 1,005 GNI per capita) while six high income countries are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and UAE (higher than US$ 12,276 GNI per capita). Second, the AMF is more likely a vehicle for resource transfer than a regional integration vehicle. Since the oil price is the external factors beyond the control of both oil producers and non-oil producers, the adjustment role of the fund is limited. The source of the non-oil producers’ balance of payment deficits is external and structural, thus cannot be mitigate by the fund.

Fiscal Policy Research Institute (FPRI), Thailand 24 Table 2.5: AMF contributions, quotas and voting power distributions

Borrowing Quotas (% of contribution) Voting Power Structural Maximum Votes Paid-in Ordinary Authorized and Subscribed Capital Automatic Extended Compensatory Agreement Overall Basic based on Capital Loan Total voting power Loan (75%) Loan (175%) Loan (50%) Facility Ceiling votes contribu (100%) (175%) (475%) tion US$ USD US$ US$ US$ US$ US$ US$ (no. of (no. of (no. of AAD (thousand) (million) (%) (million) (million) (million) (million) (million) (million) (million) vote) vote) vote) (%) 1 Jordan 9,900 45.74 1.65 45.74 34 46 80 23 80 217 75 198 273 2.00 2 UAE 35,300 163.09 5.88 163.09 122 163 285 82 285 775 75 706 781 5.72 3 Bahrain 9,200 42.50 1.53 42.50 32 43 74 21 74 202 75 184 259 1.90 4 Tunisia 12,850 59.37 2.14 59.37 45 59 104 30 104 282 75 257 332 2.43 5 Algeria 77,900 359.91 12.98 359.91 270 360 630 180 630 1,710 75 1,558 1,633 11.96 6 Saudi Arabia 88,950 410.96 14.83 410.96 308 411 719 205 719 1,952 75 1,779 1,854 13.58 7 Sudan 18,400 85.01 3.07 85.01 64 85 149 43 149 404 75 368 443 3.25 8 Syria 13,250 61.22 2.21 61.22 46 61 107 31 107 291 75 265 340 2.49 9 Somaria 7,350 33.96 1.23 33.96 25 34 59 17 59 161 75 147 222 1.63 10 Ira q 77,900 359.91 12.98 359.91 270 360 630 180 630 1,710 75 1,558 1,633 11.96 11 Oman 9,200 42.50 1.53 42.50 32 43 74 21 74 202 75 184 259 1.90 12 Qatar 18,400 85.01 3.07 85.01 64 85 149 43 149 404 75 368 443 3.25 13 Kuwait 58,800 271.66 9.80 271.66 204 272 475 136 475 1,290 75 1,176 1,251 9.16 14 Lebanon 9,200 42.50 1.53 42.50 32 43 74 21 74 202 75 184 259 1.90 15 Libya 24,690 114.07 4.12 114.07 86 114 200 57 200 542 75 494 569 4.17 16 Egypt 58,800 271.66 9.80 271.66 204 272 475 136 475 1,290 75 1,176 1,251 9.16 17 Morocco 27,550 127.28 4.59 127.28 95 127 223 64 223 605 75 551 626 4.59 18 Mauritania 9,200 42.50 1.53 42.50 32 43 74 21 74 202 75 184 259 1.90 19 Yemen 28,300 130.75 4.72 130.75 98 131 229 65 229 621 75 566 64 1 4.70 20 Palestine 3,960 18.30 0.66 0.00 14 18 32 9 32 87 75 79 154 1.13 21 Djibouti 450 2.08 0.08 2.08 2 2 4 1 4 10 75 9 84 0.62 22 Comoros 450 2.08 0.08 2.08 2 2 4 1 4 10 75 9 84 0.62 Total 600,000 2,772.05 100.00 2,753 .76 2,079 2,772 4, 851 1,386 4,851 13,167 1,650 12,000 13,650 100.0 Source: AMF Annual Report 2010

Fiscal Policy Research Institute (FPRI), Thailand 25 AMF resource is severely inadequate. At the end of 2002, for example, the total net value of outstanding loans to member countries was AAD 276 million (around US$ 1.3 billion). In contrast, the total exports of Arab countries were US$ 248 billion, while the total imports were US$ 161 billion. Not only did the approved capital undersized the magnitude of the balance of payment deficit, the fund’s requirement of information and conditionality is relatively the same as IMF. As a result, it is hard for the borrowing countries to reach an agreement on collective policies. Following the same requirement, Arab countries can access a much larger source of fund from the IMF.

2.4 North American Framework Agreement (NAFA)

NAFA was established in April 1994 under the North American Free Trade Agreement (NAFTA) involving United States, Mexico and Canada as a framework agreement in order the combine and enlarge existing bilateral swap facilities between the three member countries. The establishment of NAFA came prior to the Mexico’s financial crisis that was triggered by the devaluation of the Mexican peso in December 1994. Mexico was operating under a fixed exchange rate system in which the peso was allowed to fluctuate within a currency band. The currency came under pressure due to a large current account deficit and falling international reserves. Prior to 1994, the country was successful in implementing its fiscal and monetary policy after recovering from the 1982 debt crisis. Although growth was slow, Mexico managed to attract large amount of foreign capital investment both in the form of foreign direct investment (FDI) and also portfolio flows increasingly overtime.

NAFA represents a trilateral framework in which United States and Canada could provide funding to Mexico in order to ensure investors’ confidence and prevent speculative attack on the peso in addition to crisis assistance. NAFA’s bilateral swap network consists of 1) US$ 6 billion swap arrangement between Mexico and U.S. Treasury (US$ 3 billion from Exchange Stabilization Fund) and Federal Reserve (US$ 3 billion from swap resource) 2) CAN$1 billion swap arrangement between the Canadian and Mexican central banks 3) US$ 2 billion swap arrangement between the Canadian central bank and U.S. Federal Reserve

Fiscal Policy Research Institute (FPRI), Thailand 26 The swap fund can be drawn upon the approval of both parties subject to the agreement and periodic review by the authorities in each country (the Federal Reserve and U.S. Treasury in case of the U.S.) with a one-year activation period. NAFA is not linked to any other swap arrangement or the IMF and is not subject to IMF conditionality. Although there is no formal surveillance and monitoring mechanism under NAFA, the agreement was established in connection with the North American Financial Group, a consultative forum on economic and financial developments and policies in the three countries that comprised of Finance Ministers and Central Bank Governors of Canada, Mexico and the U.S.

Table 2.6: Available NAFA Funding Units: US$ billion Country US-MEX swap CAN-MEX swap US-CAN swap Total available Mexico 6 1* - 7 Canada - 1* 2 3 United States 6 - 2 8 *US$ - CAN$ exchange rate at the end of 2010

Since NAFA can be activated bilaterally or trilaterally subject to the agreement of relevant authorities in each country, the speed of approval can be fast and the lending conditions can be flexible. Given the small size of the available facility, however, NAFA arrangement may not be sufficient for crisis prevention and additional external bilateral swaps or IMF assistance would be needed. In the case of Mexico in 1995, for example, short-term external debt stood at US$ 37.3 billion while total external debt was above 60 percent of gross national income (GNI). The NAFA’s U.S.-Mexico and Canada-Mexico swap lines were utilized in January 1995 for the amounts of US$ 500 million and CAN$83 million respectively but were not enough to stop the peso from depreciating. The crisis was also driven by the political situation in Mexico that contributed to the loss of investors’ confidence. The U.S. and IMF eventually arranged an additional multilateral assistance package for Mexico totaling US$ 48.8 billion on January 31, 1995. The package consisted of US$ 20 billion in currency swaps and securities guarantees from U.S. Treasury’s Exchange Stabilization Fund (ESF), US$ 17.8 billion in 18- month standby credit arrangement from the IMF, US$ 10 billion from other industrialized countries through the Bank of International Settlements (BIS) and US$ 1 billion from Canada.

As a result of the economic reforms initiated by the Mexican government and in accordance with the IMF conditions, the Mexican government was able to return to the international capital market in April and repay all its swap obligations on time. The peso eventually stabilized at the end of 1995 along with the recovery of foreign exchange reserves to US$ 17 billion compared with US$ 4 billion at the beginning of the year in January. The reform initially took toll on the economy however with Mexico’s GDP fell 6.2 percent in 1995 before recovering in 1996. Due

Fiscal Policy Research Institute (FPRI), Thailand 27 to its close economic relationship with Mexico in terms of trade, employment and immigration, it was in the interest of the United States to assist Mexico in preventing the liquidity crisis from developing into a solvency crisis in addition to preventing the crisis from spreading to other emerging economies. The IMF assistance was also sought in order to increase international participation and the credibility of the program. Argentina and Brazil which also contributed US$ 1 billion to the package had to withdraw their participation, however, when they were affected by capital flights during the early part of the crisis.

2.5 Latin American Reserve Fund (FLAR)

The Andean Reserve Fund (Fondo Andinas de Reserves, FAR) was established in 1987 by five Andean countries – Bolivia, Columbia, Ecuador, Peru and Venezuela. In 1989 the fund was renamed into Fondo Latinoamericano de Reservas (FLAR). FLAR had seven member countries in total after Costa Rica and Uruguay joined in 2000 and 2009 respectively. As of December 2011, the fund had US$ 2,343.75 million in authorized capital. Limited borrowing from the capital markets also supplements member’s paid-up capital for FLAR’s source of fund. The fund was established in order to meet three objectives: (a) to provide support for member countries' balance of payments by granting credits or guaranteeing third-party loans; (b) to contribute to the harmonization of member countries exchange, monetary and financial policies; (c) to improve the conditions of international reserve investments made by member countries.

As shown in Table 2.7, FLAR offers five types of credit arrangements. First, it offers the credit for balance of payment. Member countries can borrow up to 2.5 times of its paid-in capital, with 3 years maturity and 1 year grace period for capital amortization. Second, the credit for Central Bank foreign external debt restructuring is 1.5 times the paid-in capital. The maturity of this agreement is also 3 years with 1 year grace period for capital amortization. The two types of credits are approved by the Directors. Third, the fund offers liquidity credit at the size of the paid-in capital, with 1 year maturity. Forth, the credit for contingency is provided with 2 times the size of the paid-in capital. The maturity is 6 months and the fund is renewable. Fifth, the fund provides credit for treasury 2 times the size of the paid-in capital, with 1-30 days maturity. The credits for liquidity, contingency, and treasury was approved by Executive Presidents. The borrowing quotas (Table 2.8) apply to all member countries but Bolivia and Ecuador. In the case of credit for balance of payment, central bank external public debt restructuring, liquidity and contingency, the central bank of Bolivia and Ecuador receive additional 10 percent credit in relation to other countries.

Fiscal Policy Research Institute (FPRI), Thailand 28 Each member country has one vote and one chair on the Board. However, in order to earn the place, ‘large economic size’ countries must have minimum paid-in capital of 250 million, and ‘small economic size’ must have minimum paid-in capital of 125 million. If the country cannot meet the minimum requirement, it may have a seat along with other adhering countries provided that the minimum paid- in capital is met. Decisions are made with the affirmative votes of 75 percent of the attending members, with the negative votes not exceeding 20 percent of total votes. Since the big 3 countries (Columbia, Peru, and Venezuela) was given 21 percent voting power, the veto power remains. Bolivia and Ecuador each has 10.5 percent voting power, while Costa Rica and Uruguay have 8.9 and 7.1 percent respectively.

FLAR is highly credited for its speed of lending. In the case of Peruvian crisis in 1988, FLAR was the only institution that provided credit line for emergency liquidity needs. The amount approved by the Executive President was up to 100 percent of the paid-in capital. The Executive Board then decided the lending conditions and exceptions to access limits for balance of payment. The speed of lending of FLAR is much faster compare to that of the IMF. For the monitoring and enforcement mechanism, FLAR has a zero-default record. Although FLAR members do not abide by any priority to repayment of FLAR over other creditors, the countries honored their obligations even defaulting to other creditors. As of August 2011 the fund was ranked Aa2 by Moody’s and was ranked AA by S&P.

FLAR was very active in short-term lending. In the period of 1978 to 2011, FLAR approved US$ 4,442 million to help easing balance of payment deficits, and US$ 4,403 million for liquidity enhancement. In the period 1978-2003, FLAR provided resources equivalent to, on average, 60 percent of the IMF funding to countries in Andean community. The approval of short-term credits for balance of payment deficits and debt restructuring has been, on average, 32 days. In 2009, FLAR provided US$ 480 million to Ecuador, the highest amount since the origin of FLAR, to help easing the situation resulting from the Global Financial Crisis.

Fiscal Policy Research Institute (FPRI), Thailand 29 Table 2.7: FLAR lines of credit

2. Central bank foreign external Type of Credit 1. Balance of Payments 3. Liquidity 4. Contingency 5. Treasury debt restructuring Maturity 3 years with 1 year grace period 3 years with 1 year grace period for Up to 1 year 6 months, renewable 1-30 days for capital amortization capital amortization Access Limits* 2.5 times paid-in capital 1.5 times paid-in capital paid-in capital 2 times paid-in capital 2 times paid-in capital Attribution for Approval Directors Directors Executive President Executive President Executive President Source: www.flar.net; * Bolivia and Ecuador receive additional 10 percent credit in relation to other countries except for the Treasury Credit line

Table 2.8: FLAR contributions, quotas, voting power, and key indicators

Amount GDP per Net Subscribed Capital Paid-in Capital Borrowing Voting GDP Export Import borrowed capita International (December 2011) (December 2011) Quotas Power (2009) (2009) (2009) (1978 -2011) (2009) Reserves (2009) USD USD USD USD USD USD (million) (%) (million) (%) USD (million) (million) Vote (million) USD (million) (million) USD (million) 1 Bolivia 234.4 10.00 195.7 8.35 820 1,583 10.5% 17,217 1,683 4,848 4,377 8,580 2 Columbia 468.8 20.00 391.3 16.70 1,172 1,958 21% 232,468 5,169 34,026 31,466 24,983 3 Costa Rica 234.4 10.00 234.4 10.00 586 178 8.9% 29,303 6,498 8,788 11,395 4,066 4 Ecuador 234.4 10.00 195.7 8.35 820 3,506 10.5% 52,022 3,715 13,797 15,093 3,792 5 Peru 468.8 20.00 391.3 16.70 1,172 2,011 21% 153,847 5,222 35,565 28,815 44,105 6 Uruguay 234.4 10.00 234.4 10.00 586 N/A 7.1% 31,528 9,426 5,386 6,907 797 7 Venezuela 468.8 20.00 391.3 16.70 1,172 532 21% 325,678 11,383 57,595 38,442 35,830 Total 2,343.75 100.00 2,034.1 86.79 6,328 9,768 100% 842,063 43,096 160,005 136,495 122,153 Source: www.flar.net

Fiscal Policy Research Institute (FPRI), Thailand 30 Chapter 3 Financial Safety Net Elements

Founded in different regions to cope with their economic situation and regional characteristics, regional FSNs have different regional specific elements as discussed in Chapter 2. In the previous chapter we reviewed five active regional FSNs, describing their origins, purposes, and historical developments. In this chapter we compare the five regional FSNs in various perspectives including their funding structure, speed of decision making, fund adequacy, and examine the likelihood of crisis prevention.

3.1 Elements of regional funds/FSNs

3.1.1 Fund size Table 3.1 provides a comparison of the regional fund/financial safety net arrangements reviewed in the previous chapter. In terms of funding size, the CMIM is the second largest regional FSNs after the European Financial Assistance Mechanism and other EU facilities. With the absolute size of more than tenfold the size of AMF, NAFA, and FLAR, the CMIM is more likely to provide adequate short-term liquidity crisis. The discussion in the next section and the scenario analysis in the next chapter will provide an early indication on the funding adequacy issue.

3.1.2 Speed of decision making All regional FSNs depicted in Table 3.1 appear to have an emergency loan process in which funding would be granted to the requesting member country within 3 to 4 weeks. For CMIM, this process is fast but the size is limited to only 20 percent of member’s quota prior to arranging a program with the IMF. If this ceiling of the IMF De-linked portion were to be extended, for example, to 50 percent, the fund would become more flexible and effective for crisis prevention.

3.1.3 Linkage with the IMF Although explicit or implicit involvement of the IMF is a feature in many regional FSNs, the CMIM is the only arrangement in which the IMF linkage is formalized and built into the amount of accessible fund. Smaller FSNs such as the Arab Monetary Fund or NAFA do not involve the IMF and assistance can be provided relatively quickly but the available funding is inadequate for crisis prevention. IMF’s monitoring assures creditors that the country follows conditions of the arrangement, but it lowers the flexibility of each country to follow their regional specific roadmap. Thus, regional FSNs as currently structured are able to provide short-term liquidity to their members but larger support from a global FSN is required to prevent a systemic crisis or contagion.

Fiscal Policy Research Institute (FPRI), Thailand 31 3.1.4 Surveillance and monitoring In terms of surveillance and monitoring, many regional FSNs such as the EU Financial Assistance Mechanism and Arab Monetary Fund have an effective institution in place. Funding certainty either depends on a consensus (in the EU case) or the majority provided by largest contributing members (AMF, FLAR). Short-term liquidity provision requires fewer conditions to comply but larger funding needs either involve regional specific conditions (AMF, FLAR) and/or IMF conditionality (CMIM, EU). An effective surveillance and monitoring body improves the speed of decision making and can make lending conditions more adaptive and flexible. The strengthening of AMRO’s autonomy and capacity, in the case of CMIM, will therefore greatly enhance the efficiency of the arrangement. With a greater and more comprehensive role of AMRO in crisis prevention, the CMIM will be able to expand its size and the proportion of the IMF-delinked portion in order to increase its effectiveness in providing adequate crisis prevention assistance that its members are willing to seek.

Fiscal Policy Research Institute (FPRI), Thailand 32 Table 3.1: FSNs Comparison

Available Regional Specification of Range of Size of the Surveillance and Speed of decision Flexibility Adequacy of Linkages with Certainty FSNs facilities countries fund monitoring making of conditions the fund the global FSNs Chiang Mai - Developed from - Plus 3 US$ 120 bn ASEAN+3 - 20% IMF-delinked - 20% IMF- - Insufficient - Majority of the - IMF-linked Initiatives Multi- ASEAN Swap countries Macroeconomic portion is quickly delinked portion without the quotas (80%) portion lateralization Arrangement (ASA) (China, Japan, Surveillance Office approved by based on sound IMF-linked depends on requires among ASEAN South Korea) (AMRO) located in CMIM within 3-4 measures to portion Plus 3 countries participation in countries - 10 ASEAN Singapore weeks address balance an IMF program - Bilateral swap countries - 80% IMF-linked of payment network portion depends problem - Repurchase on entering an - IMF agreement among IMF program conditionality ASEAN+3 countries with the IMF- linked portion European Financial Loans raised in the - 27 EU €60 bn Comprehensive Around 3-4 weeks - Funding The - BoP facility - Though not a Assistance international members (EFSM) program to setup a support conditions can combined and EFSM requirement, Mechanism market backed by (EFSM) surveillance by the program including be amended program decision by funding is likely EU budget or - 17 Eurozone €440/500bn European EC ,IMF and ECB according to funding is EcoFin Council provided in member members (EFSF/ESM) Commission in expert visit, loan circumstances sufficient but voting conjunction guarantees (EFSF) (EFSF) collaboration with approval and a - Precautionary each loan - EFSF key with IMF - 10 Non- €50 bn the Economic and common MoU programs are arrangement decision require assistance Eurozone (BoP facility) Financial possible limits funding unanimity from - Additional IMF members Committee, the - EFSF can raise available for Eurozone funding of up (BoP facility) IMF and ECB fund in other other member states to half the currencies, countries amount drawn intervene in from EFSF and secondary EFSM markets and (maximum €250 support financial bn) institutions though member governments Arab Monetary Fund (i) Loan for BoP - 22 Arab AAD 600 mn AMF undertakes - Fast for - Automatic loan - Inadequate - - Three (Saudi Not linked to deficits countries (roughly US$ consultations to automatic loan granted without Small fund Arabia, Algeria any FSNs and - Automatic Loan - Most of the 2.8 bn) with monitor the - Other types of conditions size and Iraq) out not subject to - Ordinary Loan members are AAD 592 mn loans require - Ordinary loan compared to of 22 member IMF member’s BoP - Extended Loan oil and gas paid-in capital more steps requires not less total net countries hold conditionality - Compensatory producers deficit during the than 1 year of export one-third of the maturity period

Fiscal Policy Research Institute (FPRI), Thailand 33 Available Regional Specification of Range of Size of the Surveillance and Speed of decision Flexibility Adequacy of Linkages with Certainty FSNs facilities countries fund monitoring making of conditions the fund the global FSNs Loan stabilization voting rights program (ii) Structural - Extended loan Adjustment requires not less Facilities (SAF) than 2 year of stabilization program North American A network of three 3 NAFTA US$ 8 bn Periodic review by Fast Flexible lending Not sufficient Bilateral or Not linked to Framework bilateral swaps members: US, (US$ 7 bn authorities in each conditions for crisis Trilateral any other swap Agreement Canada and available for country prevention agreement agreements Mexico Mexico) among the and not subject swap parties to IMF conditionality Latin America 5 types of credits 7 Andean - US$ - No formal Fast - no - Small for Each of the No formal link Reserve Fund for countries: 2,343.75mn monitoring conditionality emergency three large between - BoP Bolivia, authorized institution but for short-term funding countries FLAR lending - Central bank Columbia, capital with informally - Sufficient (Colombia, Peru credits activity and foreign debt Costa Rica, US$ 2.034.1 monitored by the for Bolivia, and Venezuela) restructuring Ecuador, Peru, mn paid-in IMF - credits for BoP Ecuador and has veto power the IMF - liquidity Uruguay, capital are determined Costa Rica - contingency Venezuela - US$ 6,328 by - treasury mn total FLAR’s Board of quota Directors, conditional on economic policy measures

Fiscal Policy Research Institute (FPRI), Thailand 34 3.2 FSNs characteristics and funding adequacy

In order to assess the sufficiency of regional arrangements, the amount of available funding for each member may be compared with international reserves and the likely need in terms of external requirement indicators such as short-term external debt and portfolio investment liabilities. Table 3.2 shows the maximum amount of fund accessible to each member of the FSNs compared with their short-term external debt stock and international reserves in 2010. The reserve-to- available fund ratio (column 4) gives an indication to the likely status of the member; whether the country is likely to be the provider or receiver of the fund. Members with very large reserve relative to accessible fund are those likely to be fund providers whose interests and funding behavior depend partly on which country is seeking assistance and the extent of spill over effects that will emanate throughout the region and beyond. It is also likely that if these fund providers are in financial trouble themselves, then the regional FSN will be inadequate given the scale of the problem as shown by the ratio of accessible fund to short-term external debt in 2010 (column 5).

For the CMIM, for example, China, Hong Kong and Japan with high reserve- to-fund access ratios of 167, 128 and 55 times, respectively (Table 3.2 column 4) are the likely fund providers in the event of a regional crisis taking place since their reserves are many times larger than their eligible drawing from the CMIM. Vietnam, on the other hand, is the likely fund receiver since the amount of accessible funding is a significant portion (1/2.5 = 40 percent) of its international reserve. The available funding should also be adequate for Cambodia and the Philippines to cover for their short-term external debts (column 5). Similarly for the AMF, the oil rich Saudi Arabia, UAE and Qatar are the likely fund providers and the funding should be sufficient for Yemen, Djibouti and Comoros but may not be able to cover short-term external debt for Sudan, Tunisia and Lebanon.

The reserve-to-fund access ratios (column 4) are very large for NAFA members including Mexico due to the inadequacy of the swap amounts as mentioned in the previous chapter. The amount of available fund is almost negligible compared with the countries’ short-term debt as shown in column 5. The FLAR arrangement, on the other hand, is able to provide its member with greater access to resource by supplementing member’s paid-up capital with borrowings from the capital markets. Since a part of FLAR’s funding is raised in the international capital market based on members’ subscribed capital that effectively leverages on countries’ reserves, it is able to offer members larger eligible funding in comparison with the total amount of their international reserves. Peru and Columbia have the highest reserve-to-fund access ratios of only 36 and 24 times respectively (column 4).

Fiscal Policy Research Institute (FPRI), Thailand 35 Table 3.2: Member Accessible Funds, Short-Term External Debt and Foreign Reserves

Units: US$ million (1) (2) (3) (4) = (3)/(1) (5) = (1)/(2) (6) = (3)/(2) Fund Access/ Reserve/ Arrangement Members Maximum Short-term International Reserves/ Short-term Short-term Access External Debt Reserves Fund Access Debt Debt CMIM China 17,100 347,524 2,847,338 166.5 5% 819% 120,000 Hong Kong 2,100 633,731 268,649 127.9 0.3% 42% Japan 19,200 1,805,697 1,061,490 55.3 1% 59% Korea 19,200 139,766 291,491 15.2 14% 209% Indonesia 11,380 31,225 92,908 8.2 36% 298% Thailand 11,380 38,471 167,530 14.7 30% 435% Malaysia 11,380 35,076 104,884 9.2 32% 299% Singapore 11,380 376,455 225,715 19.8 3% 60% Philippines 11,380 6,295 55,363 4.9 181% 879% Vietnam 5,000 6,949 12,467 2.5 72% 179% Cambodia 600 262 3,255 5.4 229% 1242% Myanmar 300 1,956 1,782 5.9 15% 91% Brunei 150 na 1,563 10.4 Lao PDR 150 - 703 4.7

EU Austria Fund size 237,387 10,075 4% - EFSM Belgium Fund size 704,351 16,894 2% 80,000 Cyprus Fund size na 539 - EFSF/ESM Estonia Fund size 8,892 2,556 29% (Eurozone) Finland Fund size 176,554 7,412 4% 590,000/ France Fund size 2,031,226 60,021 3% 670,000 Germany Fund size 1,816,441 68,189 4% Greece Fund size 244,333 1,503 1% Ireland Fund size 752,753 1,853 0% Italy Fund size 579,256 51,933 9% Luxembourg Fund size 1,155,438 751 0% Malta Fund size 31,742 536 2% Netherlands Fund size 930,044 19,533 2% Portugal Fund size 226,666 4,315 2% Slovakia Fund size 30,011 774 3% Slovenia Fund size 11,305 968 9% Spain Fund size 727,770 19,634 3% - EFSM Bulgaria Fund size 15,373 15,490 101% - BoP Facility Czech Republic Fund size 24,911 41,931 168% (Non-Eurozone) Denmark Fund size 277,942 73,618 26% 80,000 Latvia Fund size 12,723 7,270 57% 67,000 Lithuania Fund size 5,469 751 14% Hungary Fund size 32,851 44,854 137% Poland Fund size 48,413 89,000 184% Romania Fund size 25,029 43,541 174% Sweden Fund size 2,692,377 42,783 2% United Kingdom Fund size 6,734,501 68,882 1%

Source: IMF's International Financial Statistics, World Bank Database, and Joint BIS-IMF-OECD-WB External Debt Hub. 2010 data.

Fiscal Policy Research Institute (FPRI), Thailand 36 Table 3.3: Member Accessible Funds, Short-Term Debt and Foreign Reserves (cont.)

Units: US$ million (1) (2) (3) (4) = (3)/(1) (5) = (1)/(2) (6) = (3)/(2) Fund Access/ Reserve/ Arrangement Members Maximum Short-term International Reserves/ Short-term Short-term Access External Debt Reserves Fund Access Debt Debt AMF Saudi Arabia 1,952 na 445,281 228.1 13,167 Algeria 1,710 1,778 162,915 95.3 96% 9162% Iraq 1,710 na na Kuwait 1,290 na 21,373 16.6 Egypt 1,290 3,149 33,743 26.1 41% 1072% UAE 775 na 42,785 55.2 Yemen 621 313 5,871 9.5 198% 1875% Morocco 605 1,800 na 34% Libya 542 na na Sudan 404 7,012 1,036 2.6 6% 15% Qatar 404 na 30,642 75.9 Syria 291 558 19,510 67.1 52% 3499% Tunisia 282 4,979 9,471 33.6 6% 190% Jordan 217 1,310 13,079 60.2 17% 998% Bahrain 202 na na Oman 202 na 13,024 64.5 Lebanon 202 3,482 32,011 158.6 6% 919% Mauritania 202 237 238 1.2 85% 100% Somalia 161 780 na 21% Palestine 87 na na Djibouti 10 1 na 1925% Comoros 10 4 na 262%

NAFA United States 8 5,150,951 135,487 16,936 0.00% 3% 8,000 Canada 3 345,201 57,004 19,001 0.00% 17% Mexico 7 39,013 120,277 17,182 0.02% 308%

FLAR Columbia 1,172 8,209 27,778 23.7 14% 338% 6,328 Peru 1,172 6,055 42,708 36.4 19% 705% Venezuela 1,172 15,426 13,771 11.7 8% 89% Bolivia 820 103 8,195 10.0 796% 7956% Ecuador 820 369 1,480 1.8 222% 401% Costa Rica 586 2,431 4,627 7.9 24% 190% Uruguay 586 1,550 7,644 13.0 38% 493%

Source: IMF's International Financial Statistics, World Bank Database, and Joint BIS-IMF-OECD-WB External Debt Hub. 2010 data.

Members with low levels of resource relative to accessible fund are the likely fund recipients. The relative likelihood or need of funding is indicated by the reserve-to-short term external debt ratio (column 6). If the reserves of funder is relatively large compared with the funding needs of the member requiring assistance then fund approval is more likely if not automatic. This is the case for the AMF, for example, where the oil rich countries have little external liabilities. China in the CMIM is also able to provide assistance relative comfortably.

Fiscal Policy Research Institute (FPRI), Thailand 37 The likelihood of funding will also depend on the number of members likely to require assistance in a given period however. Funding adequacy will be based on the sum of their requirements. If fund adequacy is an issue then the expected behavior of the funder will likely be to supplement the fund availability, for example, providing an additional loan or central bank swap arrangement if it is in their interest. Alternatively or in combination with these additional assistances, funders are also more likely to require an arrangement with a global FSN such as the IMF. Fund adequacy also suggests the likely market perception on the soundness and credibility of the FSN assistance in a particular situation. The current crisis among the Eurozone countries is a case in point where market expectations are based on additional ability of the ECB and other institutions to provide more funds, the expansion of the EFSF/ESM, in addition to the progress on the EU fiscal reforms. Thus a large funding shortfall, especially if there is a high risk of contagion among the members, would indicate the need for a reform or an enhancement of the existing arrangement.

3.3 Challenges for the development of regional FSNs

Due to the relatively small size of the potentially accessible regional funds compared with the likely needs for systemic crisis prevention at the regional and global level, regional FSNs are still inadequate in protecting an innocent bystander from financial volatility or contagion. CMIM countries, for example, may be reluctant to apply for assistance to avoid stigma associated with entering an IMF program if a sizeable amount funding is to be secured. Greater flexibility and automaticity of funding approval e.g. through an increase in the proportion of CMIM’s IMF De-linked portion with a view to make the IMF involvement less formalized in the future will help to reduce to problem of stigma.

With larger fund size available, an effective regional surveillance and monitoring will be required, however, in order to avoid moral hazard. The IMF still has an important crisis resolution role in the regard. Some of the regional FSNs such as the EU and AMF have an effective institution in place but the CMIM, which has a potential to provide strong regional-specific crisis prevention, still needs an effective fiscal and monetary policy framework for regional growth and sustainability to anchor. An important challenge to address is how to align the interest of members with different economic conditions and requirements. Greater economic integration in the region that the member countries are currently committed to may help to achieve more policy coordination and convergence. Regional economic growth and stability are also required if the regional financial arrangement is to be able to gain market confidence and access the international capital market for its crisis prevention funding needs.

Fiscal Policy Research Institute (FPRI), Thailand 38 Chapter 4 An Analysis of CMIM Enhancement and Implementation

As noted in the previous chapter, regional FSNs have several elements that led to an efficient division of labor between the use of national reserves on the one hand, and the need for an international FSN on the other, for crisis prevention. A regional FSN leverages international reserves of its members so that the combined funding is sufficient and the reserves can be managed more efficiently. A regional FSN can also arrange needed assistance more speedily with greater degree of automaticity and flexibility than the global FSN, given more dedicated and focused regional surveillance and monitoring. This chapter outlines policy measures that help the CMIM works better in order to derive benefits of regional FSNs according to the analyses in the previous chapters. A scenario analysis of the ASEAN+3 financial cooperation in terms of reserve adequacy and funding sufficiency is also presented to demonstrate the likely benefits of the enhanced arrangement as a crisis prevention mechanism.

4.1 Policy measures to enhance FSNs’ efficiency, effectiveness, complementarities and sustainability

Policy measures to enhance the benefits of regional FSNs, including the CMIM in particular, consist of ways to address current shortcomings that limit their effective use based on the issues that have been discussed. The measures are outlined as follows,

1. Measures that leverage on countries’ resource and financial markets 1.1 Increase in effective funding from the reserve pool enough to cover possible crisis countries in the region 1.2 Additional voluntary bilateral swap arrangements to supplement the current framework in transition towards greater multilateralization commitments 1.3 Additional resource from crisis prevention funds raised in the capital market that are backed by members’ guarantee commitments

2. Measures that complement the global FSN and other regional FSNs 2.1 Increase in resource dedicated to regional crisis prevention prior to outside assistance 2.2 Extension of voluntary bilateral swap arrangements with other countries or regional FSNs 2.3 Usage of precautionary assistance from global FSN for crisis prevention to fill in expected funding gap 2.4 Enhance regional surveillance capacity focused on vulnerability assessment and crisis prevention

Fiscal Policy Research Institute (FPRI), Thailand 39 2.5 The development of a regional monitoring mechanism and a framework of regional and country-specific conditions for growth and sustainability.

The most important element is the size of regional FSN that should be sufficient for crisis prevention. Adequate regional funding will increase the speed of fund approval, encourage its use and reduce stigma since fund request and activation are likely to occur earlier. The moral hazard problem can be reduced through a regional focus on growth and sustainability and effective monitoring. The role of a regional surveillance unit such as AMRO for the ASEAN+3 region is therefore crucial for early identification of members’ crisis prevention needs and the assessment of their economic situation in accordance with regional conditions for growth and sustainability that would prevent a liquidity crisis from developing into a solvency crisis.

Additional resource from voluntary bilateral swaps among countries within and outside the region can enhance the credibility of regional arrangement. A high foreign reserves country can agree to provide a larger swap line of credit to a country that has a small amount of reserves. These additional swap lines can pave ways towards greater multilateralization of resource in the future. The credibility of regional arrangement can be further enhanced by the existence of regional crisis prevention funds like the European EFSM and EFSF/ESM that have their resource raised in the international financial markets. These funds will also provide another channel for which countries outside the region or other regional FSNs can participate in regional crisis prevention.

The resulting increase in resource dedicated to regional crisis prevention prior to explicit outside assistance (such as the IMF-delinked portion of the CMIM) lessens the perceived stigma for the country concerned. Greater regional funding helps to alleviate funding pressure on the global FSN that has to maintain resource in order to deal with systemic crises in other regions, and therefore complements other regional FSNs. Larger regional funding therefore require effective regional monitoring and surveillance by an independent regional unit (such as AMRO) that can monitor and have an effective influence on member countries based on the regional specific focus on growth and sustainability. This will also allow an earlier assessment of members’ crisis prevention needs and hence the need for outside help from other countries or precautionary assistance from the global FSN.

Fiscal Policy Research Institute (FPRI), Thailand 40 In the context of ASEAN+3 financial cooperation, the development of a regional monitoring mechanism and a framework of regional and country-specific conditions for growth and sustainability is not only important for the credibility of the CMIM but also necessary if it is to develop into an Asian Monetary Fund (AMF). It may also pave the way for the development of the Asian bond market and the Asian Currency Unit (ACU) to promote intra-regional bond holding among the member countries as their international reserves in the future.

4.2 A scenario analysis of an enhanced ASEAN+3 financial cooperation

The scenario analysis in this section looks at the crisis prevention funding needs for CMIM member countries in terms of reserve coverage and portfolio investment liabilities. These funding needs point towards the likely size of CMIM extension required. The size of CMIM will also give an indication on the need for outside precautionary funding such as those from the IMF that will also be highlighted in the analysis.

I. Reserve coverage for short-term external debt, portfolio liabilities and imports

In this scenario the reserve gaps for CMIM members are identified by asking how much assistance funding they will require in order to supplement their international reserves to cover 6 months of imports if the following occurs:

i. Each country experiences a reserve loss equal to half the amount of its short-term external debt, or ii. Each country experiences a reserve loss equal to half the amount of its portfolio liabilities.

Table 4.1 shows a summary calculation for the external debt case where it is assumed that ASEAN+3 members effectively contribute the same percentage of their international reserves for crisis prevention through CMIM and other measures including voluntary bilateral swap arrangements and crisis prevention fund guarantees as outlined above. A more detailed table showing the calculation with short-term external debt data is shown in Annex I.

Fiscal Policy Research Institute (FPRI), Thailand 41 Table 4.1: External Debt-Imports Coverage

Units: US$ billion (11 ) = (11) = (1) (4) (5) = (4)/(1) (6) (9) (10) -{(1)-(4)-(9)- (1)-(9)-(6)/2 (6)/2} Foreign Total Contribution Short-term 6-MO Current Need Need Reserve (example) % Reserve external debt Imports under CMIM (example)

China 2847.3 194.07 6.82% 347.5 876.3 -1763.1 -1603.2 Hong Kong 268.6 18.31 6.82% 633.7 250.2 302.6 316.8 Japan 1061.5 72.35 6.82% 1805.7 398.3 278.1 312.0 Korea 291.5 19.87 6.82% 139.8 273.5 71.1 71.8 Plus 3 4469.0 304.60 6.82% 2926.7 1798.4 Indonesia 92.9 6.33 6.82% 31.2 76.8 4.0 5.8 Thailand 167.5 11.42 6.82% 38.5 103.6 -40.2 -33.3 Malaysia 104.9 7.15 6.82% 35.1 94.7 12.0 14.6 Singapore 225.7 15.38 6.82% 376.5 204.1 171.2 182.0 Philippines 55.4 3.77 6.82% 6.3 36.6 -11.1 -11.9 Vietnam 12.5 0.85 6.82% 6.9 43.6 35.6 35.5 Cambodia 3.3 0.22 6.82% 0.3 3.9 0.9 1.0 Myanmar 1.8 0.12 6.82% 2.0 2.6 1.8 1.9 Brunei 1.6 0.11 6.82% na 2.0 0.5 0.5 Lao PDR 0.7 0.05 6.82% 0.0 1.1 0.5 0.5 ASEAN 666.2 45.40 6.82% 496.7 569.0 175.2 196.6 Total 5135.1 350.00 0.1 3423.4 2367.4

Notes: All data are for 2010 in US$ billion. Imports data from the World Bank database. Foreign Reserve data from IMF's International Financial Statistics (June 2007 data for Myanmar). Short-term external debt data from World Bank's Global Development Finance 2012 and the Joint BIS-IMF-OECD-WB External Debt Hub. Singapore external debt data from SingStat (2010q3) in accordance with IMF's SSDS. Data for Brunei were unavailable.

The last column of the table (column 11) shows the reserve shortfall for each country in order to cover for half of its short-term external debt and 6 months of imports (in 2010) given that around 7% of its reserve is earmarked towards regional financial cooperation. Negative numbers, for China for example, imply that the countries have enough reserve of their own. The calculation in Table 4.1 suggests that if ASEAN+3 member countries effectively commit a total of US$ 350 billion (column 4) or around 7% of reserve (column 5) then this will be enough to cover the total reserve shortfall for ASEAN countries of around US$ 200 billion and also Korea (US$ 72 billion) together or Japan (US$ 312 billion) or Hong Kong (US$ 317 billion) separately. The negative US$ 1.6 trillion figure for China shows that it has ample liquidity and will be able to play the role of major fund provider comfortably. In any event, Hong Kong is likely to receive direct assistance from China whist Japan has a convertible currency and the importance of its economy for international finance means that it is likely to gain access to IMF and other forms of global FSNs such as central bank’s liquidity.

Fiscal Policy Research Institute (FPRI), Thailand 42 For comparison, the reserve shortfall under the current CMIM arrangement alone, totaled US$ 175 billion for ASEAN, is shown in column 10 (calculation in Annex I), which implies that the current CMIM funding of US$ 120 billion is still insufficient. As seen in column 10, most of the shortfall comes from Singapore’s obligations (almost half of which is in the banking sector) due to its important role in international trade and finance. Although the risk that Singapore will be cut off from the international capital market is very small at present compared with other countries, the required resource shows the need for a sufficient safety net should an event occurs to ASEAN countries. It also points to the important role of regional surveillance to avoid crisis contagion. The next scenario analysis will consider short-term portfolio liabilities of the member countries where the figure for Singapore is closer to those of its peers.

Table 4.2 shows the second scenario where each country experiences capital outflows equal to half the amount of its portfolio investment and financial derivative liabilities in 2010. In this case, there is a reserve shortfall of around US$ 240 billion for ASEAN countries, in order to cover 6 months of their imports. The total US$ 350 billion commitment from 7% of the reserve from each ASEAN+3 country will be sufficient to cover for this shortfall. This will also be sufficient to fill in the gap for Korea, Japan or Hong Kong separately. Table 4.2 also shows that the current CMIM funding of US$ 120 billion alone will not be sufficient for ASEAN’s $US 220 billion need (column 10, calculation in Annex II). More details on the calculation are provided in Annex II.

Fiscal Policy Research Institute (FPRI), Thailand 43 Table 4.2: Portfolio Liabilities-Imports Coverage

Units: US$ billion

(11)(11) == (1) (4) (5) = (4)/(1) (6) (9) (10) -{(1)-(4)-(9)-(1)-(9)-(6)/2 Portfolio Investment (6)/2} Foreign Total Contribution and Financial 6-MO Current Need Need Reserve (example) % Reserve Derivatives Imports under CMIM (example)

China 2847.3 194.07 6.82% 221.6 876.3 -1826.0 -1666.2 Hong Kong 268.6 18.31 6.82% 464.1 250.2 217.8 231.9 Japan 1061.5 72.35 6.82% 1796.7 398.3 273.6 307.6 Korea 291.5 19.87 6.82% 518.1 273.5 260.3 260.9 Plus 3 4469.0 304.60 6.82% 3000.5 1798.4 Indonesia 92.9 6.33 6.82% 146.7 76.8 61.8 63.6 Thailand 167.5 11.42 6.82% 87.9 103.6 -15.5 -8.6 Malaysia 104.9 7.15 6.82% 124.5 94.7 56.7 59.3 Singapore 225.7 15.38 6.82% 190.8 204.1 78.3 89.2 Philippines 55.4 3.77 6.82% 36.6 36.6 4.1 3.3 Vietnam 12.5 0.85 6.82% na 43.6 32.2 32.0 Cambodia 3.3 0.22 6.82% na 3.9 0.8 0.9 Myanmar 1.8 0.12 6.82% na 2.6 0.9 0.9 Brunei 1.6 0.11 6.82% na 2.0 0.5 0.5 Lao PDR 0.7 0.05 6.82% na 1.1 0.5 0.5 ASEAN 666.2 45.40 6.82% 586.6 569.0 220.1 241.5 Total 5135.1 350.00 0.1 3587.1 2367.4

Notes: All data are for 2010 in US$ billion. Imports data from the World Bank database. Foreign Reserve data from IMF's International Financial Statistics (June 2007 data for Myanmar). Portfolio Investment and Financial Derivatives Liabilities data from IMF's International Financial Statistics (no data for Vietnam, Cambodia, Myanmar, Brunei and Lao PDR)

Figure 4.1 plots different reserve pool’s size (blue line) against ASEAN’s reserve shortfall under alternative scenarios including 1) the 50% short-term external debt coverage case (bottom red line); 2) the 50% portfolio and financial derivatives liabilities case (middle green line) and 3) the case when reserve loss is equal to half of both short-term external debt and portfolio and financial derivatives liabilities combined (top purple line). The last case is an overstatement since is there is some double counting of portfolio investment liabilities that are included in the short-term external debt measure. Funding sufficiency occurs when the blue dashed line crosses or is above other lines, with the difference in vertical distance being funding adequacy.

Fiscal Policy Research Institute (FPRI), Thailand 44 Figure 4.1: ASEAN Funding Adequacy

ASEAN Coverage US$ billion

800 Total ASEAN+3 700 Reserve Committed 600 50% ST External debt 500 & Porfolio Liabilities - 400 6mo Import Coverage 300 50% Portfolio Liabilities- 6mo 200 Import Coverage 100 50% ST External Debt 0 - 6mo Import 0 100 200 300 400 500 600 700 800 Coverage

Source: FPRI’s calculation

Total committed reserves from all ASEAN+3 members of above US$ 300 billion is therefore sufficient for the ASEAN countries to cover 6 months of imports when the loss in reserves equal to either half of short-term external debts or half of portfolio investment and financial derivatives liabilities occurs. Committed reserve beyond US$ 500 billion may be required to sufficiently cover the short-term external debt and portfolio outflows combined however. The scenario analysis therefore provides an early indication of how much further ASEAN+3 financial cooperation should be achieved in order to prevent crisis contagion in the ASEAN region.

II. CMIM Size Extension

From the scenario analysis of reserve shortfall above it is clear that a larger size for the current CMIM arrangement will be needed. Table 4.3 and 4.4 outline a similar analysis when the total size of CMIM contribution is increased by proportionately increasing each member’s contribution using the same percentage contribution distribution and purchasing multiples as those under the current arrangement. Table 4.3 shows that although the total CMIM size of US$ 350 billion will be enough to cover for the reserve loss equal to half ASEAN and Korea’s total short-term external debt and 6 months of imports (reserve shortfall of US$ 221 billion in column 10), the available quota (IMF Linked portion, column 12) under the current arrangement will not be sufficient for some individual countries. Vietnam, for example, needs US$ 37.6 billion to cover the reserve shortfall (column 10). However its extended CMIM eligibility, under the current contribution distribution and purchasing multiples, will be only US$ 14.6 (column 12) and US$ 18.2 billion in conjunction with the IMF’s Precautionary and Liquidity

Fiscal Policy Research Institute (FPRI), Thailand 45 Line (PLL) (column 16). Therefore either an amended CMIM is needed or additional funding from other forms of ASEAN+3 financial cooperation such as further swap lines or a crisis prevention fund has to be arranged. Table 4.4 shows a similar result for portfolio investment and financial derivatives liabilities coverage where the total ASEAN’s reserve shortfall is around US$ 266 billion (column 10).

From the view point of moral hazard prevention, individual countries’ contribution should be variable and consistent with their risk characteristics according to various indicators such as external debt to GDP ratio, current account as percentage of GDP, fiscal deficit as percentage of GDP, etc. Funding may be arranged such that each country commits to a basic contribution as a constant fraction of their reserves that may be different according to their grouping such as the likely high-income funders, middle-income economies and low-income economies, for example. An additional variable contribution portion is payable based on an agreed upon rule that takes into account the risk indicators mentioned above. Consideration for each country’s reserve availability and hence the purchasing multiple allowed is needed, however, in order to prevent possible shortfall as a result.

Also from Table 4.3 and Table 4.4 (column 13), the IMF De-Linked portion under the current arrangement at 20% of the total eligible is still inadequate. The total extended funding available for ASEAN will be only US$ 37 billion which is not enough to cover the reserve shortfall. Thus it is recommended that greater resource is earmarked towards regional crisis prevention prior to explicit outside assistance in order to provide adequate funding with greater flexibility and reduce stigma. Greater flexibility in fund disbursement may be achieved by raising the 20% threshold to 50% and structure the disbursement into three separate tranches: 1) Automatic disbursement of 10% subject to a previously agreed upon rule; 2) Next 20% requires a majority decision from members according to their voting rights; and 3) the remaining 20% requires a consensus among members, for example.

The capacity of AMRO to provide an effective surveillance and specialized crisis prevention assistance is important in this regard. Its role may be extended to become a center for coordinating crisis assistance response instead of relying on alternating member countries. AMRO may also be involved in helping member countries’ longer-term structural problems in order to ensure its sustainability and the stability of the region as a whole. In order to provide enough regional funding raised from the international capital market, it may also need to engage in regional financial development such as the development of Asian bond market and the Asian Currency Unit (ACU) that may become a significant reserve asset in the future.

Fiscal Policy Research Institute (FPRI), Thailand 46 Table 4.3: CMIM External Debt-Imports Coverage

Units: US$ billion

(10) = (16) = (17) = (1) (2) (3) = (2)/(1) (6) (9) (12) (13) (14) (15) -{(1)-(2)-(9)-(1)-(9)-(6)/2 (12) + (14) (12) + (15) (6)/2} IMF IMF De- Foreign CMIM Short-term 6-MO Current Need Linked Linked RFI/ CMIM+ CMIM+ Reserve Contribution % Reserve external debt Imports under CMIM Portion Portion PLL* RCF** PLL RFI/RCF

China 2847.3 99.75 3.50% 347.5 876.3 -1697.5 49.9 10.0 73.9 7.4 123.8 57.3 Hong Kong 268.6 12.25 4.56% 633.7 250.2 310.7 6.1 Japan 1061.5 112.00 10.55% 1805.7 398.3 351.7 56.0 11.2 121.2 12.1 177.2 68.1 Korea 291.5 56.00 19.21% 139.8 273.5 107.9 56.0 11.2 26.1 2.6 82.1 58.6 Plus 3 4469.0 280.00 6.27% 2926.7 1798.4 161.9 38.5 221.2 22.1 383.1 184.0 Indonesia 92.9 13.28 14.29% 31.2 76.8 12.7 33.2 6.6 16.1 1.6 49.3 34.8 Thailand 167.5 13.28 7.92% 38.5 103.6 -31.5 33.2 6.6 11.2 1.1 44.4 34.3 Malaysia 104.9 13.28 12.66% 35.1 94.7 20.7 33.2 6.6 13.8 1.4 46.9 34.6 Singapore 225.7 13.28 5.88% 376.5 204.1 179.9 33.2 6.6 10.9 1.1 44.1 34.3 Philippines 55.4 13.28 23.98% 6.3 36.6 -2.4 33.2 6.6 7.9 0.8 41.1 34.0 Vietnam 12.5 2.92 23.40% 6.9 43.6 37.6 14.6 2.9 3.6 0.4 18.2 14.9 Cambodia 3.3 0.35 10.75% 0.3 3.9 1.2 1.8 0.4 0.7 0.1 2.4 1.8 Myanmar 1.8 0.18 9.82% 2.0 2.6 2.0 0.9 0.2 2.0 0.2 2.9 1.1 Brunei 1.6 0.09 5.60% na 2.0 0.5 0.4 0.1 1.7 0.2 2.1 0.6 Lao PDR 0.7 0.09 12.45% 0.0 1.1 0.5 0.4 0.1 0.4 0.0 0.8 0.5 ASEAN 666.2 70.00 10.51% 496.7 569.0 221.2 184.0 36.8 68.2 6.8 252.3 190.9 Total 5135.1 350.00 0.1 3423.4 2367.4 345.9 75.3 289.4 28.9 635.3 374.9

Notes: All data are for 2010 in US$ billion. Imports data from the World Bank database. Foreign Reserve data from IMF's International Financial Statistics (June 2007 data for Myanmar). Short-term external debt data from World Bank's Global Development Finance 2012 and the Joint BIS-IMF-OECD-WB External Debt Hub. Singapore external debt data from SingStat (2010q3) in accordance with IMF's SSDS. Data for Brunei were unavailable.

The amount of IMF's assistance ceiling for each country is based on member's quota as of February 2012 which is different from the post 2010 quota reform not yet implemented, valued at 1 SDR = US$ 1.55108 * 6-month Precautionary and Liquidity Line (PLL) arrangement at approval for short-term shock crisis bystander at 500% of quota ** Rapid Financing Instrument (RFI) and augmented Rapid Credit Facility (RCF, for low-income countries) at 50% of quota per year

Fiscal Policy Research Institute (FPRI), Thailand 47 Table 4.4: CMIM Portfolio Liabilities-Imports Coverage

Units: US$ billion

(10) == (16) = (17) = (1) (2) (3) = (2)/(1) (6) (9) (12) (13) (14) (15) -{(1)-(2)-(9)-(1)-(9)-(6)/2 (12) + (14) (12) + (15) Portfolio Investment (6)/2} IMF IMF De- Foreign CMIM and Financial 6-MO Current Need Linked Linked RFI/ CMIM+ CMIM+ Reserve Contribution % Reserve Derivatives Imports under CMIM Portion Portion PLL* RCF** PLL RFI/RCF

China 2847.3 99.75 3.50% 221.6 876.3 -1760.5 49.9 10.0 73.9 7.4 123.8 57.3 Hong Kong 268.6 12.25 4.56% 464.1 250.2 225.9 6.1 Japan 1061.5 112.00 10.55% 1796.7 398.3 347.2 56.0 11.2 121.2 12.1 177.2 68.1 Korea 291.5 56.00 19.21% 518.1 273.5 297.1 56.0 11.2 26.1 2.6 82.1 58.6 Plus 3 4469.0 280.00 6.27% 3000.5 1798.4 161.9 38.5 221.2 22.1 383.1 184.0 Indonesia 92.9 13.28 14.29% 146.7 76.8 70.5 33.2 6.6 16.1 1.6 49.3 34.8 Thailand 167.5 13.28 7.92% 87.9 103.6 -6.7 33.2 6.6 11.2 1.1 44.4 34.3 Malaysia 104.9 13.28 12.66% 124.5 94.7 65.4 33.2 6.6 13.8 1.4 46.9 34.6 Singapore 225.7 13.28 5.88% 190.8 204.1 87.1 33.2 6.6 10.9 1.1 44.1 34.3 Philippines 55.4 13.28 23.98% 36.6 36.6 12.8 33.2 6.6 7.9 0.8 41.1 34.0 Vietnam 12.5 2.92 23.40% na 43.6 34.1 14.6 2.9 3.6 0.4 18.2 14.9 Cambodia 3.3 0.35 10.75% na 3.9 1.0 1.8 0.4 0.7 0.1 2.4 1.8 Myanmar 1.8 0.18 9.82% na 2.6 1.0 0.9 0.2 2.0 0.2 2.9 1.1 Brunei 1.6 0.09 5.60% na 2.0 0.5 0.4 0.1 1.7 0.2 2.1 0.6 Lao PDR 0.7 0.09 12.45% na 1.1 0.5 0.4 0.1 0.4 0.0 0.8 0.5 ASEAN 666.2 70.00 10.51% 586.6 569.0 266.1 184.0 36.8 68.2 6.8 252.3 190.9 Total 5135.1 350.00 0.1 3587.1 2367.4 345.9 75.3 289.4 28.9 635.3 374.9

Notes: All data are for 2010 in US$ billion. Imports data from the World Bank database. Foreign Reserve data from IMF's International Financial Statistics (June 2007 data for Myanmar). Portfolio Investment and Financial Derivatives Liabilities data from IMF's International Financial Statistics (no data for Vietnam, Cambodia, Myanmar, Brunei and Lao PDR).

The amount of IMF's assistance ceiling for each country is based on member's quota as of February 2012 which is different from the post 2010 quota reform not yet implemented, valued at 1 SDR = US$ 1.55108 * 6-month Precautionary and Liquidity Line (PLL) arrangement at approval for short-term shock crisis bystander at 500% of quota ** Rapid Financing Instrument (RFI) and augmented Rapid Credit Facility (RCF, for low-income countries) at 50% of quota per year

Fiscal Policy Research Institute (FPRI), Thailand 48 Annex I

Units: US$ billion

(7) = (8) = (10) = (11) = (1) (2) (3) = (2)/(1) (4) (5) = (4)/(1) (6) (9) (1) - (2) - 0.5x(6) (1) - (4) - 0.5x(6) (7) - (9) (8)-(9) Foreign CMIM Total Contribution Short-term Remaining Remaining 6-MO Current Need Need Reserve Contribution % Reserve (example) % Reserve external debt under CMIM (example) Imports under CMIM (example)

China 2847.3 34.20 1.20% 194.07 6.82% 347.5 2639.4 2479.5 876.3 -1763.1 -1603.2 Hong Kong 268.6 4.20 1.56% 18.31 6.82% 633.7 -52.4 -66.5 250.2 302.6 316.8 Japan 1061.5 38.40 3.62% 72.35 6.82% 1805.7 120.2 86.3 398.3 278.1 312.0 Korea 291.5 19.20 6.59% 19.87 6.82% 139.8 202.4 201.7 273.5 71.1 71.8 Plus 3 4469.0 96.00 2.15% 304.60 6.82% 2926.7 2909.6 2701.0 1798.4 Indonesia 92.9 4.55 4.90% 6.33 6.82% 31.2 72.7 71.0 76.8 4.0 5.8 Thailand 167.5 4.55 2.72% 11.42 6.82% 38.5 143.7 136.9 103.6 -40.2 -33.3 Malaysia 104.9 4.55 4.34% 7.15 6.82% 35.1 82.8 80.2 94.7 12.0 14.6 Singapore 225.7 4.55 2.02% 15.38 6.82% 376.5 32.9 22.1 204.1 171.2 182.0 Philippines 55.4 4.55 8.22% 3.77 6.82% 6.3 47.7 48.4 36.6 -11.1 -11.9 Vietnam 12.5 1.00 8.02% 0.85 6.82% 6.9 8.0 8.1 43.6 35.6 35.5 Cambodia 3.3 0.12 3.69% 0.22 6.82% 0.3 3.0 2.9 3.9 0.9 1.0 Myanmar 1.8 0.06 3.37% 0.12 6.82% 2.0 0.7 0.7 2.6 1.8 1.9 Brunei 1.6 0.03 1.92% 0.11 6.82% na 1.5 1.5 2.0 0.5 0.5 Lao PDR 0.7 0.03 4.27% 0.05 6.82% 0.0 0.7 0.7 1.1 0.5 0.5 ASEAN 666.2 24.00 3.60% 45.40 6.82% 496.7 393.8 372.4 569.0 175.2 196.6 Total 5135.1 120.00 0.0 350.00 0.1 3423.4 3303.4 3073.4 2367.4

Notes: All data are for 2010 in US$ billion. Imports data from the World Bank database. Foreign Reserve data from IMF's International Financial Statistics (June 2007 data for Myanmar). Short-term external debt data from World Bank's Global Development Finance 2012 and the Joint BIS-IMF-OECD-WB External Debt Hub. Singapore external debt data from SingStat (2010q3) in accordance with IMF's SSDS. Data for Brunei were unavailable.

Fiscal Policy Research Institute (FPRI), Thailand 49 Annex II

Units: US$ billion

(7) = (8) = (10) = (11) = (1) (2) (3) = (2)/(1) (4) (5) = (4)/(1) (6) (9) (1) - (2) - 0.5x(6) (1) - (4) - 0.5x(6) (7) -(9) (8)-(9) Portfolio Investment Reserves Reserves Foreign CMIM Total Contribution and Financial Remaining Remaining 6-MO Current Need Need Reserve Contribution % Reserve (example) % Reserve Derivatives under CMIM (example) Imports under CMIM (example)

China 2847.3 34.20 1.20% 194.07 6.82% 221.6 2702.3 2542.5 876.3 -1826.0 -1666.2 Hong Kong 268.6 4.20 1.56% 18.31 6.82% 464.1 32.4 18.3 250.2 217.8 231.9 Japan 1061.5 38.40 3.62% 72.35 6.82% 1796.7 124.7 90.8 398.3 273.6 307.6 Korea 291.5 19.20 6.59% 19.87 6.82% 518.1 13.3 12.6 273.5 260.3 260.9 Plus 3 4469.0 96.00 2.15% 304.60 6.82% 3000.5 2872.7 2664.1 1798.4 Indonesia 92.9 4.55 4.90% 6.33 6.82% 146.7 15.0 13.2 76.8 61.8 63.6 Thailand 167.5 4.55 2.72% 11.42 6.82% 87.9 119.0 112.2 103.6 -15.5 -8.6 Malaysia 104.9 4.55 4.34% 7.15 6.82% 124.5 38.1 35.5 94.7 56.7 59.3 Singapore 225.7 4.55 2.02% 15.38 6.82% 190.8 125.8 114.9 204.1 78.3 89.2 Philippines 55.4 4.55 8.22% 3.77 6.82% 36.6 32.5 33.3 36.6 4.1 3.3 Vietnam 12.5 1.00 8.02% 0.85 6.82% na 11.5 11.6 43.6 32.2 32.0 Cambodia 3.3 0.12 3.69% 0.22 6.82% na 3.1 3.0 3.9 0.8 0.9 Myanmar 1.8 0.06 3.37% 0.12 6.82% na 1.7 1.7 2.6 0.9 0.9 Brunei 1.6 0.03 1.92% 0.11 6.82% na 1.5 1.5 2.0 0.5 0.5 Lao PDR 0.7 0.03 4.27% 0.05 6.82% na 0.7 0.7 1.1 0.5 0.5 ASEAN 666.2 24.00 3.60% 45.40 6.82% 586.6 348.9 327.5 569.0 220.1 241.5 Total 5135.1 120.00 0.0 350.00 0.1 3587.1 3221.6 2991.6 2367.4

Notes: All data are for 2010 in US$ billion. Imports data from the World Bank database. Foreign Reserve data from IMF's International Financial Statistics (June 2007 data for Myanmar). Portfolio Investment and Financial Derivatives Liabilities data from IMF's International Financial Statistics (no data for Vietnam, Cambodia, Myanmar, Brunei and Lao PDR)

Fiscal Policy Research Institute (FPRI), Thailand 50 Chapter 5 Conclusion

This study has looked at the role of regional Financial Safety Nets (FSNs), with consideration for the Chiang Mai Initiatives Multilateralization (CMIM) in particular, in supplementing the global FSNs for providing crisis prevention assistance. It also reviewed other regional arrangements including the European Financial Assistance Mechanism (EFSM), Arab Monetary Fund (AMF), North American Framework Agreement (NAFA), and Latin America Reserve Fund (FLAR) that have different foundation, structure, and characteristics in terms of size of fund, speed of decision making, conditions, funding adequacy, certainty, surveillance and monitoring, and linkage with global FSNs.

CMIM is the second largest regional FSNs after the European Financial Assistance Mechanism and the only arrangement in which the linkage to a global FSN (the IMF) is formalized and built into its funding structure. Smaller sized regional FSNs such as the Arab Monetary Fund or NAFA can provide crisis assistance relatively quickly with limited conditions if not automatically, but larger support from a global FSN is required to prevent a systemic crisis or contagion. The issue of fund size and flexibility is also associated with the problem of moral hazard and stigma. Larger fund size, such as the European Financial Assistance Mechanism, necessitates an effective regional surveillance and monitoring body to mitigate the problem of moral hazard. Greater automaticity and flexibility in terms of conditionality for short-term assistance at the regional level (e.g. under the AMF, NAFA or FLAR), on the other hand, will help to increase the speed of approval and reduce stigma associated with receiving funding. Short-term liquidity provision requires fewer conditions to comply but larger funding needs either involve regional specific conditions (AMF, FLAR) and/or IMF conditionality (CMIM, EU).

Funding method also affects the amount of funds available compared with total members’ resource. Reserve pooling by regional FSNs such as the AMF and FLAR enables the members to manage their international reserves more efficiently. A network of bilateral swap arrangements at the regional level such as NAFA and CMIM can leverage members’ reserves and enhance regional coordination. The more developed regional FSNs such as the European Financial Assistance Mechanism and FLAR together with regional surveillance and monitoring will be able to access international financial market for its resource and able to offer more crisis prevention funding for its members. Given these findings, the following measures should enhance the efficiency and effectiveness of the CMIM,

Fiscal Policy Research Institute (FPRI), Thailand 51 5.1 Measures that leverage on countries’ resource and financial markets

5.1.1 Increase in effective funding from the reserve pool enough to cover possible crisis countries in the region - CMIM’s resource can be increased substantially in order to account for the crisis prevention needs of its members. Reserve coverage measures based on short-term external debt, portfolio investment liabilities and imports, for example, can give an early indication of how much funding will be required and whether members’ contribution will be sufficient. - From the view point of moral hazard prevention, individual countries’ contribution could be based on 1) A basic contribution as a constant fraction of their reserves that may be different according to their grouping such as the likely high-income funders, middle- income economies and low-income economies, for example. 2) An additional variable portion that is payable based on an agreed upon rule that takes into account the risk indicators and consistent with their risk characteristics according to various indicators such as external debt to GDP ratio, current account as percentage of GDP, fiscal deficit as percentage of GDP, etc. Consideration for each country’s reserve availability and hence the purchasing multiple allowed is also needed in order to prevent possible shortfall as a result. 5.1.2 Additional voluntary bilateral swap arrangements to supplement the current framework in transition towards greater multilateralization commitment - A high foreign reserves country can agree to provide a larger swap line of credit to a country that has a small amount of reserves. These additional swap lines can pave ways towards greater multilateralization of resource in the future. 5.1.3 Additional resource from crisis prevention funds raised in the capital market that are backed by members’ guarantee commitments - The credibility of regional arrangement can be further enhanced by the existence of regional crisis prevention funds like the European EFSM and EFSF/ESM that have their resource raised in the international financial markets. These funds will also provide

Fiscal Policy Research Institute (FPRI), Thailand 52 another channel for which countries outside the region or other regional FSNs can participate in regional crisis prevention.

5.2 Measures that complement the global FSN and other regional FSNs

5.2.1 Increase in resource dedicated to regional crisis prevention prior to outside assistance - In order to provide adequate funding with greater flexibility and reduce stigma, greater flexibility in fund disbursement may be achieved by raising the 20% threshold to 50%, for example, and structure the disbursement into three separate tranches: 1) Automatic disbursement of 10% subject to a previously agreed upon rule; 2) Next 20% requires a majority decision from members according to their voting rights; and 3) the remaining 20% requires a consensus among members, for example. 5.2.2 Enhance regional surveillance capacity focused on vulnerability assessment and crisis prevention - AMRO has an important role for early identification of members’ crisis prevention needs and the assessment of their economic situation in order to prevent a liquidity crisis from developing into a solvency crisis. Its greater capacity will enable a larger funding size for regional crisis prevention. Its role may be extended to become a center for coordinating crisis assistance response instead of relying on alternating member countries. AMRO may also be involved in helping member countries’ longer-term structural problems in order to ensure its sustainability and the stability of the region as a whole. In order to provide enough regional funding raised from the international capital market, it may also need to engage in regional financial development such as the development of Asian bond market and the Asian Currency Unit (ACU) that may become a significant reserve asset in the future

And other measures such as,

5.2.3 Extension of voluntary bilateral swap arrangements with other countries or regional FSNs,

5.2.4 Usage of precautionary assistance from global FSN for crisis prevention to fill in expected funding gap, and

Fiscal Policy Research Institute (FPRI), Thailand 53 5.2.5 The development of a regional monitoring mechanism and a framework of regional and country-specific conditions for growth and sustainability.

These measures should be implemented with the view of further enhancing ASEAN+3 financial cooperation and eventually formalizing any arrangements within the ASEAN+3 framework. In addition, an overall assessment of member countries’ fiscal and monetary conditions that supports policy coordination is also important. Fiscal and current account deficits, exchange rate misalignment and financial sector’s fragility can affect a country’s long run international investment position and hence its reserve adequacy and public debt sustainability. Funding adequacy does not depend only on the absolute size of members’ total resource commitment but also on the variability of their likely liquidity needs. The assessment of member countries’ risks and vulnerabilities to external shocks that influence the aggregate risk of the arrangement is therefore an important area for further research.

Fiscal Policy Research Institute (FPRI), Thailand 54 References

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Fiscal Policy Research Institute (FPRI), Thailand 55