Asian cooperation should start with financial stability

Asia World

Author: Editorial Board, ANU

‘Stand your ground, don’t retreat’ is how to survive a bear attack. The same is true for surviving COVID-19. Countries that retreat into themselves will face worse health outcomes, deeper recessions and slower recoveries than open ones. Whatever misguided comfort people may get from closing their country, it cannot overcome the basic arithmetic of national accounting: closed economies will see living standards collapse. Governments understandably were first preoccupied with domestic priorities, but a regional response will now make domestic challenges easier to manage. A lack of cooperation will make them harder.

An employee wears synthetic gloves as she counts Indonesia's rupiah banknotes amid the spread of coronavirus disease (COVID-19) in Jakarta, Indonesia, 19 March 2020 (Photo: REUTERS/Willy Kurniawan).

An employee wears synthetic gloves as she counts Indonesia's rupiah banknotes amid the spread of coronavirus disease (COVID-19) in Jakarta, Indonesia, 19 March 2020 (Photo: REUTERS/Willy Kurniawan).

Global integration clearly has its downsides. We are living them right now. Asian economies face three crises simultaneously: a health pandemic, an economic collapse of both demand and supply, and a wave of financial crises engulfing emerging economies. Each crisis is feeding-off the others. Different countries are in different stages of each crisis, but the core shocks are the same. Struck first by the virus, Asian economies are now positioned to restart their economies sooner.

‘Remember the good times’ is what we tell people when they lose a loved one. We remind them that the decades of good times far outweigh the bad times they are experiencing. The same is true for Asian integration. The pain being experienced from COVID-19 is severe, but temporary. It does not justify throwing out the decades of uninterrupted prosperity delivered by openness to international trade, investment and people.

Asia needs more integration, not less, if it is to manage these crises. The case for cooperation has never been stronger. Access to medical equipment, vaccines and food is strengthened by open markets, not diminished by them. Concentrating supply chains in a single national market makes them less resilient, not more. Macroeconomic stimulus is stronger when it is coordinated, and the positive spill-overs from productivity-enhancing structural reform are greatest when countries act in unison.

Asian cooperation should start with stabilising financial systems. Financial stability is a prerequisite for governments to be able to provide the health and economic responses necessary to address COVID-19. The existing patchwork of international institutions and mechanisms are dangerously inadequate. The political and economic stigma of seeking IMF assistance is alive and well. The IMF has failed to provide the low-conditionality precautionary financing that could have addressed this, and the one thing it could do — an expanded issuance of its international reserve asset, Special Drawing Rights, to help countries bolster their financial buffers — is nowhere to be seen.

Regional mechanisms are not much better. It is telling that no Asian countries have turned to the Chiang Mai Initiative Multilaterlization despite the significant financial pressures they face. Regional development banks could, and should, fill the gap by providing more financial support without onerous conditionality. But the reality is that much of the support for regional financial stability will need to come from bilateral sources, particularly central bank swap lines and loans between finance ministries, ideally coordinated through a regional approach.

In this week’s lead essay, Brad Setser assesses how Asian economies are financially positioned to ride out the crisis. He argues that Asian countries are well-placed to handle the financial implications of the crisis, particularly the increase in public debt, but with some notable exceptions.

‘Economies like Taiwan and South Korea have it relatively easy’, he notes. Both were awash with savings headed into the crisis and are well-placed to finance increased public spending. Japan is similarly well-placed. ‘Japan’s domestic debt stock gets too much attention, while its role as a global creditor gets too little’, says Setser. ‘Japan has long been able to borrow at zero — almost eliminating the real burden of its admittedly large stock debt’.

China similarly faces limited financial difficulties. ‘This surprises some’, says Setser. ‘An enormous amount of attention has been paid to the rise in China’s domestic debt after 2008, but that debt isn’t actually central government debt — China chose to carry out its 2009 stimulus through local government investment vehicles, state enterprises funded by state banks and its shadow financial system’.

So where are there financial concerns in the region? ‘Only one of the major economies in East Asia poses a real concern’ warns Setser: ‘Indonesia’. Indonesia’s low savings and relatively small tax base means it has been borrowing internationally to fill the gap. Its high levels of external debt, combined with falling sources of foreign exchange (through the collapse in commodity prices, trade and tourism), has put Indonesia in a difficult spot.

Indonesia has sought to bolster its foreign exchange reserves by placing a US$4.3 billion bond with international investors in April. But Setser warns that this carries risk. ‘Higher borrowing needs from a fiscal deficit that is forecast to rise to 5 per cent of GDP without steady foreign inflows into the local bond market do pose a financing challenge’.

COVID-19 may be entering a new more asymmetric phase. Advanced economies are increasingly getting a better handle on it (with some notable exceptions), while many emerging economies are continuing to struggle. This risks putting a financial spotlight on emerging economies, making the need for external financial assistance through currency swap lines and bilateral loans all the more important. COVID-19 spread quickly across the world. But we should not forget that financial crises spread even faster.

The EAF Editorial Board is located in the Crawford School of Public Policy, College of Asia and the Pacific, The Australian National University.

This article is part of an EAF special feature series on the novel coronavirus crisis and its impact.