Sunday, May 3, 2009

Asia’s $120 Billion Reserve Fund to Boost Investor Confidence

Asian nations will set up a $120 billion foreign-currency reserve pool by year-end to help revive investor confidence as economies around the region falter amid the worst global recession since World War II.

The Association of Southeast Asian Nations, together with Japan, China and South Korea, will use the funds in times of turmoil. They will set up a surveillance unit that will identify risks to the region and provide oversight of the fund. Japan also offered $60 billion of yen-denominated swap facilities.

“It’s not so much the amounts of money being put in, but the concept of these countries getting together and cooperating,” Mark Mobius, who helps oversee $20 billion in emerging-market assets at Templeton Asset Management Ltd., said in an interview yesterday in Bali, Indonesia. “That’s a very positive development.”

The fund, known as the Chiang Mai Initiative, widens access to foreign-exchange reserves allowing nations such as Indonesia and Thailand, recipients of International Monetary Fund bailouts a decade ago, to defend their currencies. The 13 nations have accumulated more than $3.6 trillion of currency reserves since, with China owning more than half of the assets.

“The idea is for the Asean plus three countries to effectively look after ourselves with our own reserves,” Thai Finance Minister Korn Chatikavanij said yesterday in Bali, where the officials met.

$100 Billion Loans

The IMF arranged more than $100 billion of loans to Thailand, Indonesia and South Korea after their currencies collapsed during the 1997-1998 crisis. In return, governments were forced to cut spending, raise interest rates and sell state-owned companies.

In Thailand, former Prime Minister Thaksin Shinawatra asked his countrymen to fly the national flag on offices, homes and factories after making the last payment in 2003 of the $12.3 billion it drew. Indonesia repaid its debt in 2006, four years before schedule.

Following yesterday’s agreement, Japan will contribute $38.4 billion to the fund, while China and Hong Kong together will add another $38.4 billion to the pool. South Korea’s contribution will be $19.2 billion.

The Southeast Asian nations will contribute 20 percent of the total amount. Thailand, Indonesia, Malaysia and Singapore, the four biggest Southeast Asian economies, will contribute $4.77 billion each, and the Philippines will provide $3.68 billion.

Surveillance System

Under the Chiang Mai Initiative, Asian nations can borrow, without restrictions, 20 percent of an agreed swap amount. They can tap the 80 percent balance only after agreeing to IMF-style restrictions.

That may change as the surveillance system is developed, Korn said. The IMF, Asian Development Bank and the Asean Secretariat will be tapped initially for their expertise in such matters, finance ministers said.

“We feel that we ought to also develop a surveillance system and manage it ourselves as opposed to needing to rely on the surveillance system of institutions outside the region,” Korn said. “The idea is that as we increase our surveillance capacity, the de-linked portion increases.”

Nine of the region’s 10 currencies tracked by Bloomberg fell against the U.S. dollar in the first three months of the year. This quarter, eight have gained against their U.S. counterpart.

‘Real Traction’

“One of the beneficiaries of this crisis, if you want to call it that, has been the way it speeded up the regional market development,” said Gerard Lyons, London-based chief economist at Standard Chartered Bank, said in an interview in Bali. “The Chiang Mai Initiative has now started to get real traction.”

Countries such as Japan and China are doing more to help others navigate through the crisis. China last month announced plans to create a $10 billion investment cooperation fund and offer $15 billion in credit to its Southeast Asian neighbors.

Japan’s Finance Minister Kaoru Yosano yesterday said the country will offer $60 billion of yen-denominated swap facilities to help nations during a financial crisis. Asia’s biggest economy will also guarantee up to 500 billion yen ($5 billion) of yen-denominated bonds, or Samurai bonds, issued in Japanese markets by developing countries, he said.

“The entire world was hit by the crisis and it can only be addressed through international cooperation,” Yosano said. Cooperation is “the resource we achieved in the meeting.”