Ravi Menon: Regional safety nets to complement global safety nets
Welcome remarks by Mr Ravi Menon, Managing Director of the Monetary Authority of
Singapore, at the opening ceremony of the ASEAN+3 Macroeconomic Research Office
(AMRO), Monetary Authority of Singapore, Singapore, 31 January 2012.
* * *
Director, AMRO, Wei Benhua,
Counselor, AMRO, Yoichi Nemoto,
Head, Civil Service and Permanent Secretary (Finance) Peter Ong,
Distinguished guests, ladies and gentlemen.
Good morning.
Genesis of the Chiang Mai Initiative
1. Twelve years ago, we took the first steps in a momentous journey that has led us
here today.
2. It was the aftermath of the Asian Financial Crisis. The Crisis had ravaged several
economies in the region and was a wake-up call to all of us. Rapid economic growth was not
enough. To sustain growth and foster stability, sound macroeconomics and strong financial
supervision mattered. Asian economies had to get their domestic acts together. And they did,
with painstaking reforms over the last 15 years. So, when the Global Financial Crisis hit Asia
in 2008/2009, Asian economies were shaken, but did not keel over.
3. The Crisis taught us another lesson: had the region better harnessed the resources
it had available, it might have been in a stronger position to deal with the crisis. It was this
conviction that provided the impetus for the first proposals for a regional financing
arrangement.
4. And so, in May 2000, the Finance Ministers of ASEAN+3 gathered in the idyllic city
of Chiang Mai in the highlands of northern Thailand, to discuss the establishment of a
network of bilateral swap agreements. Thus was born the Chiang Mai Initiative. By October
2003, thirteen bilateral swap agreements had been successfully concluded, with a combined
total size of roughly US$35 billion.
5. In May 2007, ASEAN+3 Finance Ministers agreed to transform these bilateral
agreements into a multilateral agreement that would also provide a platform for mutual
surveillance and dialogue. The Chiang Mai Initiative Multilateralisation, or CMIM, thus came
into being in March 2010, with a war chest of US$120 billion. The CMIM operates as a
common US dollar liquidity pool. A member state facing balance-of-payments or external
liquidity problems can swap its local currency for US dollars from this pool. The size of the
swap can be up to a fixed multiple of its contribution.
6. Today marks another important milestone in that journey - the opening of the
ASEAN+3 Macroeconomic Research Office, or AMRO. AMRO is not just any research outfit.
It is a critical component of the emerging regional architecture, based on mutual
co-operation, surveillance and solidarity. Singapore is delighted and honoured to host
AMRO.
7. But before I say more about AMRO, I want to touch briefly on the role of regional
safety nets, and how they complement global safety nets.
Why regional financial safety nets matter
8. That we live in an increasingly connected world is well known and understood. I will
not bore you with statistics on the growing linkages in trade and finance that bind our
countries together. Economic and financial integration in Asia has produced significant
benefits for our economies. But increased connectedness also means greater potential for
contagion - for the transmission of economic and financial shocks across countries within the
region.
9. This does not mean we should roll back the tide and become more insular. But it
does mean that we have to watch closely developments in one another's economies, assess
potential spillover effects, exchange views on policy responses, and, at times of stress, pool
our resources to restore confidence in our markets.
10. In an environment of increased uncertainty and volatility, it is incumbent on each of
our economies to build strong buffers. This includes financial buffers in the form of a healthy
foreign reserve position and a well-capitalised banking sector. It also includes policy buffers
in the form of prudent monetary and fiscal stance in good times that gives scope for a more
accommodative posture during times of slack or crisis.
11. But sometimes we cannot do it alone, despite having good fundamentals. At times
of crisis, markets may be slow in discerning progress made in national policies. This is where
external validation and resources can help build credibility and restore confidence. While the
role of the IMF and multilateral organisations remains critical in this regard, regional
arrangements can be a useful complement.
12. Take for example, the European experience. In 2009, when countries in Central and
Eastern Europe came under stress, neighbouring economies contributed to financing
schemes together with the IMF. This helped to stabilise the situation, showing how regional
cooperation has a role to play alongside countries' own national buffers and international
financing mechanisms. More recently, in 2010, the European Financial Stability Facility, or
EFSF, was set up in response to an intensifying sovereign debt crisis. The EFSF may not
have worked as well as it could, but it has helped to prevent the crisis from escalating. The
Europeans are now developing plans for a stronger, permanent facility in the form of the
European Stability Mechanism.
13. Regional safety net mechanisms - like the CMIM - will provide added assurance to
markets that governments have the tools and resources to deal with the economic or
financial challenges at hand. They can be more focused in surveillance, more timely in
execution, and more contextual in policy prescription, providing balance to the multilateral
approach.
Why regional financial safety nets alone are not enough
14. But regional safety nets do not obviate the need for global ones. Let me offer two
reasons why.
15. First, where a crisis is largely regional in nature, contagion can be rapid and the
capacity of a regional safety net can be diminished. Again, consider the European
experience. Earlier this month, ratings agency Standard and Poor's downgraded the credit
ratings of nine Eurozone countries. One key consequence was that the EFSF itself was
downgraded, since the EFSF ultimately derives its rating from the countries that fund it.
Global safety nets may well be necessary as a complement in situations like these.
16. Second, Asian countries will play an increasingly prominent role in international
financial institutions like the IMF as the centre of economic gravity moves eastwards. Asia
will over time make contributions to the IMF commensurate with its larger role in the global
economy. It is therefore in the interest of Asian countries to have the IMF continuing to play
an active role in the region, and to effectively complement regional financing arrangements
like the CMIM.
17. Indeed, in today's precarious situation, it is in Asia's interest that the resources of
the IMF are enhanced. Asia will not be immune to an escalation of the sovereign debt crisis
and any ensuing protracted slowdown in Europe. In such a scenario, a well-resourced IMF
will reassure markets, by helping to dampen any spillover effects and mitigating the risk of an
excessive contraction in economic activity.
18. In short, a robust response to crisis can entail three concentric layers of defence:
 a first layer of credible economic policies backed by national resources;
 a middle layer of regional mechanisms to provide added credibility, minimise
spillovers, and foster regional stability; and
 a third layer of multilateral support through the IMF.
19. All three layers - national, regional and global - must complement and reinforce one
another. Well-designed, they can operate as a package, offering a comprehensive suite of
financial options to countries in need.
AMRO - The focal point of regional surveillance
20. Let me now turn to AMRO, the emerging focal point for regional surveillance
underpinning the CMIM. AMRO was set up to perform three important functions:
 to conduct surveillance and contribute to the early detection of risks in the region;
 to facilitate the implementation of remedial action; and
 to inform the decision making of the CMIM.
21. These functions help to ensure that any activation of the CMIM mechanisms will be
predicated on informed and independent judgement.
22. AMRO will give ASEAN+3 authorities a new and vital perspective as it considers the
impact of global developments on ASEAN+3 as a region. AMRO's surveillance toolkit will be
based on its own in-house capabilities, access to policymakers in ASEAN+3, and regular
dialogue and exchange of information with the IMF and other international financial
institutions. We envision AMRO emerging over time as an authoritative interpreter of
economic and financial developments in the Asian region.
23. AMRO's progress since its establishment in May 2010 has been remarkable. It
commenced operations just a year later, in May 2011. It has since conducted a number of
surveillance visits in the region. Last month, AMRO presented its first set of Economic
Review and Policy Dialogue reports at a meeting of ASEAN+3 Finance and Central Bank
Deputies. AMRO's ability to deliver such comprehensive reports within such a short time of
becoming operational speaks well of the quality of its leadership and staff.
24. Singapore is very pleased to serve as the base for AMRO's operations. We are fully
committed to supporting AMRO - in matters both financial and administrative. As AMRO
expands over the next few years and builds up its capabilities, we look forward to active
engagement and collaboration.
To be effective, AMRO must be independent and objective in its assessments, and candid
about risks and vulnerabilities. I am happy to note that, in its surveillance reports, AMRO has
sought to clearly identify policy risks and areas for improvement in the ASEAN+3 economies.
It is critical that AMRO sustains this effort and develops an effective consultation process
with ASEAN+3 economies.
Conclusion
25. The journey of regionalism as represented by the CMIM is an ongoing one. Today's
official opening of AMRO is an important milestone in that journey that we can all take pride
in. On behalf of my colleagues in ASEAN+3, I would like to congratulate AMRO and its
director, Mr Wei Benhua, on your strong start and wish you every success. Let me also
extend our warm wishes and full support to Mr Yoichi Nemoto, who will take over from
Mr Wei as AMRO director later this year.
26. Ensuring AMRO's success is a shared responsibility. Let us work together to make
AMRO a strong and credible institution, reputed around the world for its expertise in the
economic affairs of our region.
27. Thank you.