Asia May Resist Tapping $120 Billion Fund as Region Improves

By Shamim Adam and Aloysius Unditu

May 5 (Bloomberg) -- Asian nations may resist dipping into their new $120 billion foreign-exchange reserve pool as the region is showing signs of emerging from the worst global recession since World War II, officials and economists said.

“It’s better if we do not take the funds,” Anggito Abimanyu, head of fiscal policy at Indonesia’s Finance Ministry, said in an interview yesterday. “If things are returning to normal, we don’t need to tap the funds. The fund is for contingencies.”

The Asian Development Bank expects regional growth to accelerate to 6 percent next year from 3.4 percent in 2009 as stimulus packages boost domestic demand. China’s 4 trillion yuan ($585 billion) spending plan is increasing consumption and supporting the region’s exports, while shipments from Taiwan, Singapore and Indonesia begin to rise on a monthly basis.

“Now that we are moving into the recovery phase, confidence is returning to the system and the risk of a funding crisis is dissipating quite quickly,” said Peter Redward, head of emerging Asia research at Barclays Capital in Singapore. “Adding another layer of funding through the initiative is not going to add anything.”

Indonesia’s rupiah has risen 11.7 percent in the past three months, making it the best performing among the 10 most-traded currencies in the Asia outside Japan, recovering from a 6.8 percent drop in the preceding three months. The South Korean won has gained 8.3 percent in the period from a 6.7 percent drop.

The Association of Southeast Asian Nations, together with Japan, China and South Korea, on May 3 agreed on terms for the so-called Chiang Mai Initiative and to use the funds in times of turmoil. The pool will be ready by year-end.

Swine Flu

“Even if we don’t need to use it, we want to be prepared,” South Korea’s Finance Minister Yoon Jeung Hyun said in an interview in Bali yesterday. “From Asia’s perspective, having another leg or another source to depend upon for liquidity is good.”

The preparation may be useful. The European Union yesterday cut its forecast for the euro-area economy to show a contraction twice as deep as it projected just three months ago. In the U.S., a report this week may show unemployment probably climbed in April to a 25-year high.

The export and tourism-dependent Asia may also be affected by swine flu, as Americans and Europeans curtail travel amid concern the World Health Organization may declare a pandemic.

“The spread of the new health threat of influenza H1N1 requires us to stay vigilant on the possible impact,” finance ministers from the 13 nations said in a statement on May 3 after announcing the terms for the reserve fund.

Fund Contributions

Japan will contribute $38.4 billion to the fund, while China and Hong Kong together will add another $38.4 billion to the pool. South Korea’s contribution will be $19.2 billion.

The Southeast Asian nations will contribute 20 percent of the total amount. Thailand, Indonesia, Malaysia and Singapore, the four biggest Southeast Asian economies, will contribute $4.77 billion each, and the Philippines will provide $3.68 billion.

The Asian financial crisis a decade ago, which forced Thailand, Indonesia and South Korea to borrow from the International Monetary Fund, helped nations including Indonesia take “proactive” steps, Indonesian President Susilo Bambang Yudhoyono said in Bali today.

The IMF arranged more than $100 billion of loans to the three Asian nations after their currencies collapsed during the 1997-1998 crisis. In return, governments were forced to cut spending, raise interest rates and sell state-owned companies.

Critics including former World Bank chief economist Joseph Stiglitz, a Nobel laureate, say IMF policies needlessly deepened the region’s recession.

International Community

Asian nations such as Indonesia choose to seek help from its neighbors instead of borrowing from the IMF during the latest crisis. Indonesia raised $5.5 billion of standby loans from the ADB, World Bank, Australia and Japan. Indonesia also increased the size of its currency swap arrangements with China and Japan to bolster access to foreign exchange.

“One of the most significant positive outcomes from this crisis has been the way the international community has rallied together,” Yudhoyono said in the speech.

To contact the reporter on this story: Shamim Adam in Bali at sadam2@bloomberg.net; To contact the reporter on this story: Aloysius Unditu in Jakarta at aunditu@bloomberg.net