Asian Monetary Fund – an unrealised dream

Wong Chin Yoong

The US Treasury market is the largest and the most liquid sovereign debt market in the world. It is estimated that emerging countries are holding up to US$1 trillion is US debts. – EPA pic, February 16, 2023.

THE other day, Prime Minister Anwar Ibrahim revisited the idea of the Asian Monetary Fund (AMF), Japan’s inspiration to combat the 1997 financial crisis in the region.

He proposed a strengthening of non-US-centric regional monetary cooperation to buffer against such crises.

To many, the problem lies in the dominance of the US dollar over global trade and finance.

This leads to a recurring huge demand for dollar assets, driving down long-term dollar interest rates, and making dollar borrowing cheaper for everyone.

Unsurprisingly then, it encourages more external borrowing for emerging markets in dollars, and locks in the dollar invoicing.

Global liquidity, predominantly in the form of US Treasury bills, that facilitates cross-border financial and commercial transactions is inevitably dollar-dominant.

The dollar is simply the currency of all currencies.

The “Volker disinflation shock” in the early 1980s – persistent interest rate hikes to tame the decade-long high U.S inflation rate by Paul Volker, then the Federal Reserve chair – pushed the Latin American economies, which borrowed in dollars in the 1970sm off the cliff resulting in the infamous “lost decade”.

The roaring 1990s, thanks partly to global financial liberalisation, for good and bad, saw the Kuala Lumpur Composite Index put in a spectacular performance.

Greenspan’s pre-emptive strike against inflation in 1994, however, suddenly took away the punch bowl just as the party got going, stirring a capital reversal that crashed the index. Then finance finister Anwar Ibrahim even floated the idea of capital control.

When global investors ran against regional economies concurrently in 1997, the massive capital reversal quickly drained the dollar liquidity.

Countries that defended the peg using dollar reserves ended up with speculative attacks that crashed their currencies even harder. In the end, currency depreciation inflated dollar debt, and the credit crunch put the domestic economy in turmoil.

Which brings us to the Asian Monetary Fund.

If there is a deep and liquid Asian bonds market, foreign reserves can be kept in Asian bonds while Asian trade can be invoiced and settled in the Asian currency unit.

The ensuing demand for Asian assets will only foster the depth of Asian financial markets, insulating regional economies from the dollar interest rate cycles.

But I doubt anyone is paying serious attention to the proposal that has already outlived its usefulness.

Geopolitics has changed, first of all. 

The curtain of strategic engagement between China and the US has been drawn, giving way to the containment of China by western alliances, including Japan and South Korea.

It is highly unlikely that the western alliance in the Asia Pacific will help the renminbi become a global currency. Nor would it allow China to dominate regional monetary arrangements.

Meanwhile, it is impropable that China will adhere to a playbook led by Japan.

Economically speaking, AMF also seems irrelevant as today’s financial structure no longer resembles that of the 20th century.

Debt is largely domestic currency denominated and contracted in the long term, and there are ample currency swap arrangements and foreign reserves.

That means floating exchange rates are no longer as fearful. Even though the Fed has been dramatically tightening monetary policy since last March, it didn’t scar the world economy at all.

Look no further than our own economy.

None of the events in recent years – massive ringgit depreciation, Bernanke’s 2013 taper tantrum, the 2015 1MDB scandal, the 2018 China-US trade war, the 2020 pandemic, the Fed’s persistent interest rate hikes since March 2022 – have led to a financial meltdown.

In fact, Malaysia’s economy recorded the fastest growth in 22 years when ringgit depreciation looked like a one-way bet.

Most critically, regional bond markets are too fragmented with vastly diverse levels of development to establish a single bond market with liquidity as deep as the US bond market.

In short, while the global monetary system needs an overhaul, the Asian Monetary Fund isn’t a practical option. It will forever remain a dream. – February 16, 2023.

* Wong Chin Yoong is a professor of economics at Universiti Tunku Abdul Rahman, Kampar campus.

* This is the opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insight. Article may be edited for brevity and clarity.

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