Asia's Emergency Cash Buffer Remains Intact If Needed

(Bloomberg) -- Asia’s economies can handle rising interest rates and a limited U.S.-China trade war, according to simulations run by researchers with Asia’s $240 billion collective liquidity buffer, set up in the aftermath of the region’s financial crisis two decades ago.

Still, officials are monitoring conditions more closely during the ongoing emerging market rout.

The liquidity buffer, now known as the Chiang Mai Initiative Multilateralization (CMIM), is an agreement among countries in the Association of Southeast Asian Nations, China, Japan and South Korea to pool funds to be used in the event of a short-term liquidity crisis. It came into effect in March 2010 after its members decided to strengthen an earlier 2000 agreement.

Though no government has yet to actually tap the funds, they offer an alternative to reaching out to the International Monetary Fund, which many officials in the region still resent for the austerity policies imposed on some countries as conditions for help in the aftermath of the Asian crisis.

"In light of the heightened risks in the region, AMRO has stepped up its surveillance of regional developments and is in close contact with the authorities," said Hoe Ee Khor, chief economist of the Asean+3 Macroeconomic Research Office, or AMRO, the Singapore-based research and monitoring unit of CMIM.

Here are excerpts of an interview with Khor, who previously worked for the IMF and Singapore’s central bank.

How do you assess conditions in Asia’s emerging markets –- where are you seeing signs of stress?

As the Fed continues its policy rate normalization and unwinds its balance sheet, regional emerging markets with structural vulnerabilities, such as continuing reliance on external financing, will come under pressure. While the region has benefited from large inflows of foreign funds, a faster-than-expected tightening in global financial conditions amid a sharp re-pricing of risks can exacerbate capital outflows and heighten exchange-rate volatility.
We have already seen some signs of these pressure points, as the region is not immune to the recent market turmoil in Argentina and Turkey. However, emerging Asian economies are generally on a stronger footing and are able to withstand shocks.

Which economies are you most concerned about?

Obviously, the emerging market economies in the region are the ones in the spotlight at the moment because of risk aversion. However, all the regional economies are also at risk from the escalating trade conflict between the U.S. and China. Hence, we are closely monitoring the situation.

Is AMRO or any other authority conducting stress tests or similar exercises?

We have done some simulations of the impact of a limited trade war between the U.S. and China and its spillover on the region, and have analyzed the effects of a sharp spike in interest rates on the economies in the region. The results have basically confirmed our views that the economies in the region are relatively sound and while they would be adversely affected by the shocks, the impact would be limited.

Has any government sought to use the facility? Do you expect that they will?

Regional authorities have so far been able to manage the external shocks relatively well on their own without the need for external assistance and we expect this to remain the case for now. However, as part of AMRO’s mandate, we stand ready to support regional authorities, should the need arise.

Are you concerned about the pace of decline in central banks’ reserves?

So far, despite the decline in foreign reserves, the level of reserves for most countries in the region is still well above the minimum reserve adequacy levels by most metrics, whether it is in months of imports or coverage of short-term debt. Central banks have been judicious in using foreign reserves to intervene in the markets and have also allowed the exchange rates to move more freely to absorb the shocks.

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