Southeast Asia nations, along with China,
Japan and Korea, doubled swap reserves in the Chiang Mai Initiative
Multilateralization, or CMIM, to $240 billion on Thursday, in an effort to fend
off risks regarding balance-of-payments and short-term liquidity difficulties
as growth in the region slows.
Asia
Development Bank, the region development lender that is also known as ADB, on
Friday slashed the growth forecast for Southeast Asia to 4.7 percent from its
initial estimate of 5.2 percent, due to weak exports in Indonesia, Thailand’s
political deadlock, and rising tension between China and Vietnam.
Launched
in 2010, CMIM aims to provide a pool of funds from which member countries with
thin foreign exchange reserves can draw immediately in order to avoid financial
crisis.
The
latest amendment, effective July 17, initiated a CMIM Precautionary Line and
increased the IMF de-linked portion to 30 percent from 20 percent.
“This
amendment will strengthen the regional safety net for the CMIM participants in
responding to potential or actual balance-of-payments and short-term liquidity
difficulties,” Bank Indonesia said on its website on Friday.
For
Indonesia, CMIM provides the second line of defense for the country’s currency
and monetary system should it face another massive capital outflow rush seen in
the 1997-98 Asia financial crisis, the 2008 global financial crisis, and to
lesser extend in 2013 when the US Federal Reserve announced its plan to scale
back its bond-buying stimulus program.
The
country’s current account balance — the widest accounts for goods and service
trade, income transfer and remittances — has been in deficit for almost three
years, placing the country at the mercy of foreign funds in financing its
economy.
Foreign
exchange reserves at Bank Indonesia is now at $107.7 billion, enough to cover
six months worth of imports and debt payments.
The
central bank has also entered currency swap agreements with China, Korea and
Japan totaling around $49 billion. With the CMIM’s latest amendment, Indonesia
can draw up to $22.8 billion, up from $11.9 billion previously.
Currency
swaps spare Bank Indonesia from using its precious foreign currency reserves to
service trade or debt payments to countries it has swap deals with.
Bank
Indonesia governor Agus Martowardojo said on Thursday that the country’s
economy and financial market is stable in the second quarter of this year. Agus
said that Indonesia anticipates an impact from China’s economic slowdown.
Still,
Agus warned of the risk that if the Fed increases the interest rate sooner than
anticipated, it might encourage a trader exodus from the emerging market to
seek safety in the US dollar.
ADB in
its report anticipated that the Fed may raise interest rates in mid-2015,
taking into consideration of US economic rebound and stable inflation outlook.
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