ADB Says It’s Desirable to Ease Rules on Asian Currency Swaps

By Arijit Ghosh

Feb. 17 (Bloomberg) -- The Asian Development Bank said it’s “desirable” to ease restrictions on the amount nations can swap under an currency accord between Southeast Asian countries, Japan, China and South Korea as the global recession deepens.

Finance ministers from the 10-member Association of Southeast Asian Nations and the three northern neighbors will meet in Thailand on Feb. 22 to expand a pool of foreign-exchange reserves to protect their currencies. They may also ease rules that require economic austerity measures to borrow 80 percent in a currency swap under the so-called Chiang Mai Initiative, ADB President Haruhiko Kuroda said.

Easing the conditions linked to the International Monetary Fund’s lending programs will enlarge the amount countries such as Indonesia can borrow amid rising borrowing costs, slowing the depreciation of its currency. The rupiah has plunged 22 percent in the past six months, making it the worst performing after South Korea’s won among 10 Asian currencies outside Japan.

“The easing of IMF linkages could be desirable,” Kuroda said in an interview in Jakarta yesterday. “It’s a safety net and markets have calmed down partly because of swap arrangements outside the Chiang Mai Initiative as well as enlargement of the initiative.”

South Korea expanded its currency swap agreements with China and Japan, the region’s two biggest economies, on Dec. 12. India and Japan also signed an accord to swap as much as $3 billion of currencies in June.

Currency Swaps

The U.S. Federal Reserve extended its agreement to provide $30 billion in U.S. currency to the Bank of Korea by six months until the end of October, South Korea’s central bank said Feb. 4.

The IMF’s new Short-Term Liquidity Facility, which enables lending by certain countries without conditions, will also help in easing rules under the Chiang Mai Initiative, Kuroda said. Only countries in good standing with the IMF qualify for the short-term lending program.

Still, Indonesia, which exited an IMF program in 2003 and repaid the lender early, may not borrow from the IMF because of political considerations, said Fauzi Ichsan, chief economist at Standard Chartered Plc in Jakarta. Indonesia will elect legislators in April, which will be followed by a presidential poll in July.

“Ideally, you could go to the Fed but the concern is they could turn around and say ‘why don’t you go to the IMF,’” said Ichsan. The Chiang Mai Initiative “would help as Bank Indonesia seeks ammunition.”

Risk Premium

At the Feb. 22 meeting finance ministers will probably expand the pool of foreign-currency reserves to $120 billion from $80 billion, Kuroda said.

A $5.5 billion so-called standby loan from Japan, Australia, the World Bank and the ADB and $4 billion of proposed bond sales may help shore up Indonesia’s reserves, central bank Governor Boediono said on Feb. 4.

“The bond market has seized and the risk premium faced by emerging economies in Asia has jumped,” Kuroda said. “Even those countries who have no balance-of-payment deficit, when their governments try to borrow to finance long-term development projects they face prohibitively high risk premiums.”

Indonesia’s foreign-exchange holdings of $50.9 billion as of Jan. 31 are the 10th biggest in Asia and less than half those of Thailand.

“The reason why the rupiah is volatile is because the supply of dollars is drying up,” said Standard Chartered’s Ichsan.

To contact the reporters on this story: Arijit Ghosh in Jakarta at aghosh@bloomberg.net