Asia's economies are better together in battling the fallout from coronavirus
In 1984 Hollywood blockbuster Indiana Jones and the Temple of Doom, the film's title character faced a tough decision. While crossing a rickety bridge over a crocodile-infested river, his young companion tripped and was left hanging on for dear life. If Indiana did nothing, the boy would fall to a gruesome death. But if he tried to cross the bridge to help him, the additional weight risked collapsing the entire structure.
Many emerging Asian governments feel a bit like Indiana Jones in trying to manage the coronavirus pandemic. While Western governments are going into unprecedented debt to save their economies, much of it financed by their own central banks and markets, the governments of emerging economies in Asia need to borrow money from abroad to save their populations from the health and economic fallout of Covid-19.
But borrowing from abroad creates risks which could lead to a financial crisis. It's a brutal trade-off, yet one that can be managed through regional cooperation.
This is one of the major recommendations of a new report from an eminent panel of regional economists called An Asian Strategy for Recovery and Reconstruction After Covid-19, which sets out an agenda for cooperation.
Asia' tourism industry has almost completely collapsed in the wake of the pandemic. Photo: EPA alt=Asia' tourism industry has almost completely collapsed in the wake of the pandemic. Photo: EPA
Emerging Asian economies have been hit on all sides by Covid-19. Collapsing exchange rates have inflated the size of their foreign debts while rising bond yields have seen the cost of servicing these debts increase, with the collapse of trade, commodity prices, tourism and investment also causing sources of foreign exchange to dry up.
These economies are not to blame for their predicament. Thanks to decades of reform, Asian financial systems are far more effective at managing risk than they were in the late 1990s, when much of the region was gripped by a financial crisis. Banks are well capitalised. Supervisory frameworks are stronger. Exchange rates are determined more by the market and better able to absorb shocks. Large current account imbalances have narrowed considerably. Macroeconomic stability has given Asian economies more monetary and fiscal policy freedom and independence.
Despite substantial reform, emerging economies remain unable to undertake the sort of vital measures being implemented in advanced economies. These include large-scale expenditures on health care to treat and reduce the spread of Covid-19, income support payments that make lockdowns possible, fiscal stimulus to support demand as the virus abates and large-scale asset purchases by central banks to keep economies liquid, contain borrowing costs and ensure financial markets function effectively. Some of this lack is caused by increased informality in emerging economies, but much of it is a symptom of shallower financial systems with relatively weak institutions.
Reducing regional financial risks while ensuring countries have adequate resources to fight Covid-19 will require stronger domestic, bilateral, regional and global policies. The pandemic will continue to worsen in some countries unless there are resources to fight it. Economies will remain closed for longer and the ultimate global cost will be higher. Financial risks will affect the whole region. A surge of financial crises has already engulfed Ecuador, Zambia and Argentina. Turkey and South Africa are vulnerable, and Brazil, Russia and Mexico have seen substantial currency depreciation. Indonesia is the first line of defence against financial contagion in Asia.
Economists see Indonesia, where this worker was preparing to reopen his shop on Tuesday, as the first line of defence against financial contagion in Asia. Photo: EPA alt=Economists see Indonesia, where this worker was preparing to reopen his shop on Tuesday, as the first line of defence against financial contagion in Asia. Photo: EPA
Domestically, ensuring policymakers and institutions have the legal tools and protections necessary to respond quickly and effectively will be vital. Bailing out banks can send ministers to jail in some countries, a legacy of the Asian financial crisis. Having clear bankruptcy and resolution processes will reduce the crisis' ultimate cost. Promoting transparency in institutions will build trust among the public and investors, reduce risks and volatility and improve the functioning of markets.
Bilaterally, currency swap lines between central banks and loans between finance ministries should be used to fill the gaps left by inadequate global and regional financial safety nets. Most emerging Asian economies have been left out of the US Federal Reserve's currency swap network and are politically unable to go to the International Monetary Fund. Asian economies which do have access to US swap lines and have deep, widely used currencies " including Japan and Australia " can extend their swap line networks to include other Asian countries. This will reassure markets and provide temporary foreign exchange to refinance debts. Credit risk from these measures is negligible, while a failure to provide adequate liquidity today requires more costly interventions tomorrow. Facilities between finance ministries should be used to help provide political cover to central banks.
Most emerging Asian economies have been left out of the US Federal Reserve's currency swap network. Photo: Xinhua alt=Most emerging Asian economies have been left out of the US Federal Reserve's currency swap network. Photo: Xinhua
Regionally, development banks should proactively expand and create more limited-conditionality liquidity facilities while regional financing mechanisms expand the availability of precautionary lending and increase surveillance activities.
Globally, Asian IMF members must push for a major new issuance of special drawing rights (SDRs) combined with the creation of new limited-conditionality precautionary lending facilities. A major new SDR issuance will provide vital foreign exchange during times of financial stress while greater access to precautionary financing will reassure markets and provide greater financial resources with less IMF-stigma. Asian members of the G20 should push for a renewal of bilateral loans to the IMF and, in the longer-term, push for IMF reform to increase the quota shares of emerging economies.
Asian governments have had a domestic focus since the spread of Covid-19. This is understandable, but it is a false economy. International cooperation makes domestic challenges easier to manage. Now more than ever, Asia's economies are better together.
Adam Triggs is director of research, and Shiro Armstrong is director, at the Asian Bureau of Economic Research, The Australian National University. They are among the contributors to the paper An Asian Strategy for Recovery and Reconstruction After Covid-19 available at eaber.org/covid19
This article originally appeared on the South China Morning Post (SCMP).
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