Impact of Eurozone Financial Shocks
on an Increasingly Integrated and
Globally Connected ASEAN
Jayant Menon
Lead Economist (Trade and Regional Cooperation)
Office of Regional Economic Integration
Asian Development Bank
Boustead Annual Globalisation Lecture 2014
University of Nottingham- Kuala Lumpur,
19th February, 2014
The views expressed in this presentation are those of the author and do not necessarily
reflect the views and policies of the Asian Development Bank, or its Board of Governors
or the governments they represent.
Presentation Outline
• Introduction- more regionally
integrated and globally connected;
benefits but also risks
• Direct Impacts of Eurozone shock
• Indirect Impacts
• Is the region ready for another
crisis?
Progress of Integration – Asia
(intraregional as % of total)
ASEAN – defining characteristics
• ASEAN - the most durable regional
association in the developing world.
• Four defining characteristics:
a) Diversity – greater than any other major
regional grouping. History, language,
politics, and economics (50:1 GDP/cap),
population, resource endowments.
b) Generally rapid economic development.
But ASEAN membership no guarantee
(Myanmar)
ASEAN – defining characteristics
c) Avoidance of strong supra-national
organization; deliberately under-powered
secretariat; the ‘ASEAN Way’ – strengths
& weaknesses.
d) Unlikely to ever be an EU-style
organization; or a customs union with
common macroeconomic policies.
- No political appetite, nor economic basis
ASEAN – defining characteristics
• ASEAN today is more regionally
integrated and globally connected than
it has ever been.
• Regional integration has been
increasing- trade, FDI, equity and bond
holding, and highest output correlation
• Less than East Asia, but more than
other Asian subregions.
Progress in Regional Integration,
2008–2011
Production Network
and Trade
Capital Markets
Macroeconomic
Links:
Intraregional
Output
Correlations
Intraregional
FDI
Intraregional
Trade
Intraregional
Equity Holdings
Intraregional
Bond Holdings
50.08
55.02
24.98
6.36
0.02
5.33
East Asia
41.81
36.17
17.6
2.84
0.59
Southeast
Asia
6.32
24.61
9.54
9.49
0.7
South Asia
0.03
4.61
0.04
The
Pacific
and Oceania
1.91
8.05
0.46
Asia
Central Asia
0.36
0.35
Intra-ASEAN Holdings of Debt
Securities
ASEAN – defining characteristics
• As an open, outward-looking region,
ASEAN today is more globally
connected than it has ever been.
• The level of interdependence is driven
not so much by increasing regional
integration, but a common dependence
on external markets.
• Trade-investment nexus and ‘Factory
Asia’
ASEAN – defining characteristics
• A rare example of rising regional
integration while at the same time
increasing globally connexion
• These features deliver significant
benefits, but they also carry risks.
• Increased vulnerability to external
shocks, as well as contagion that
spreads rapidly across the region
Merchandise Export Growth
(y-o-y, %, 3-month moving average)
Current Account of ASEAN4, 20112013 (quarterly, as a share of GDP)
Growth in Bank Lending
(y-o-y, %)
Response of ASEAN Equity Returns to
a Negative Eurozone Equity Shock
Response of Output Growth to a
Eurozone Equity Shock
Direct Impacts
• Eurozone financial crisis would have a small
but non-negligible impact on the region’s stock
markets and economic growth.
• In terms of real impact, Singapore and
Malaysia are more exposed
• What we cannot quantify are the indirect
effects that may flow from adjustments that
take place via changes in value assessments
and confidence.
Indirect Impacts
• Since the region’s asset prices—both real and
financial—have seen significant increases
resulting from the large inflows of capital driven
by quantitative easing in the advanced
economies, underlying perception among
global investors of asset bubble.
• If the direct impact of a Eurozone shock leads
to a re-assessment of asset valuations in the
region and perceptions of risk, this could lead
to further corrections
Indirect Impacts
• Eurozone crisis is one possible trigger; any
shock, including tapering, could be an
instigator
• Early signs of possible impacts of increased
tapering were witnessed in India and Indonesia
in particular last year
• Even right now, the volatility of foreign
exchange rates and equity markets are clear
signs of increased vulnerability that could
easily spillover into a crisis
What if crisis strikes?
• Although ASEAN is more resilient cf. AFC,
should crisis strike, is the region ready?
• Not quite- regional financial safety net still
inadequate
• Size of CMIM is still too small at $240 bil; less
than 3% of about $5 trillion in reserves of
ASEAN+3
• Even smaller if increased regional integration
results in contagion and multiple applications.
• Stigma attached to IMF conditionality for majority
(more than 30%) of quota
Now, is it usable?
• Although recent reform measures constitute
major progress, but questions on “how” and
“who” remain
• On “how”, two options: complement to, or
substitute for, IMF
• On “who”, not +3, since they are providers not
users. Have their own bilateral swaps
• For original ASEAN, size of quotas too small as
substitute, but maybe complement. Maybe new
ASEAN more likely, as significant share of their
reserves. Eg, Cambodia: non-IMF quota of
$360M; reserves in Feb 2012 of $3.6B. But in
crisis, may still look beyond the CMIM.
Now, is it usable?
• Regardless of whether complement or
substitute to IMF, the speed and efficiency of
requests need to be addressed. Uncertainty
over procedures, since never tested.
• Decisions lie with a high-level, non-resident
body. The CMIM is not a fund, but a reserve
pooling system.
• Needs to be demonstrated that CMIM is
superior to quick-disbursing bilateral swaps,
which appears to be quickly becoming the
first line of defense after national reserves.
Now, is it usable?
As an alternative to the IMF, then 3 reforms:
a) Further increase in the size of the CMIM:
$240B almost certainly inadequate. Eg, the original
ASEAN 4 countries have a non-IMF quota of about
$7B each, but during the AFC the Thai and
Indonesian packages were about $17B and $40B,
respectively.
So either the size or the non-IMF limit need to be
increased.
b) Expanding CMIM Membership:
Has more to do with diversifying the source of
funds than simply expanding its size of the fund. To
include countries less directly connected to the
East Asian business cycle.
Now, is it usable?
c) Strengthening AMRO’s Credibility:
This is crucial for CMIM; perhaps more
important than size or diversity of membership,
ie, capacity to lead – or be a key partner in – a
credible rescue package is the key.
Eg., with AFC, IMF lead, but funds also came
from regional and bilateral sources
So, CMIM still appears unusable if crisis strikes
tomorrow, but progress being made- and
hopefully before, rather than because of, the
next crisis!
Thank you!
For inquiry or comments, please contact:
Jayant Menon
Lead Economist (Trade and Regional Cooperation)
Office of Regional Economic Integration
Telephone: (63-2) 632-6205
Email: jmenon@adb.org
Twitter: @jayantmenon
Menon and Ng (2013), containing detailed results, downloadable from:
http://aric.adb.org/pdf/workingpaper/WP116_Me
non_Ng_Eurozone_shocks.pdf