Safeguarding Asian currencies

Far Eastern currencies are under pressure again

Asian currencies are under renewed pressure as the US economy slows.

The Japanese yen reached a 30 month low against the dollar, and the Philippine and Singapore currencies reached 11-year lows this week.

Dr Mahathir wants an Asian solution to the currency problem

Now the countries of Southeast Asia in the Asean group want to strengthen a swap arrangement to protect their currencies.

But any deal is being delayed by the opposition of Malaysia to the involvement of the International Monetary Fund in any swap arrangements.

Finance ministers will meet in Kuala Lumpur later this week to try and reach a compromise agreement, after Japanese officials failed to win Malaysia over to their point of view.

At stake is some $1bn in emergency financing that central banks in China, Japan and Korea are prepared to make available to Asean countries in the event of another currency crisis.

Need for protection

After the Asian crisis of 1997-98, when many Asian currencies were dramatically devalued, Japan offered to lend money to central banks in countries like Thailand and Indonesia to protect their currencies against further runs.

But most Asian countries had already received big bail-out packages from the IMF and the World Bank, which involved commitments to restructuring their economies and economic reform.

Malaysia resisted signing such IMF agreements, instead opting to protects its currency, the ringgit, by a system of capital controls that prevented money fleeing the country.

Japan wants any future swaps to be tied to a country agreeing reforms with the IMF.

Only 10% of the swap facility could be borrowed on an emergency basis in a currency crisis.

Malaysia objects to this condition.

It argues that the IMF itself now lends some money in advance of a crisis under its contingent credit facility.

But potential lenders insist they want some safeguards on how their money might be used.

"If you look at the potential lenders who have big foreign exchange reserves, they will like to have some housekeeping rules in place for implementation of the currency swaps," said Kyung Tae Lee, president of the Korea Institute of International Economic Policy.

Pressure of a slowdown

However, the economic slowdown in the region is putting pressure on countries to reach a deal.

Malaysia has recently cut its growth forecast for this year from 7% to 5%-6%, and Singapore is expected to follow suit.

The economies of the Philippines and Indonesia are already in a weakened state.

Both economies are dependent on exports, particularly to the United States, which have been hit by the sharp slowdown in the US economy.

As the world economy declines, it seems that regional trade and aid arrangements are becoming more important.

There is pressure within the US to scale back the size and role of the IMF, and US trade policy is increasingly focusing on a regional trade deal with the rest of Latin America.

So the idea of an Asian monetary fund, rejected two years ago, now seems more plausible.

The Association of Southeast Asian Nations (Asean) includes Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.