COVID-19 Impact, Risks, and Policy Responses in ASEAN - Masatsugu Asakawa

Speech | 2 October 2020

Speech by Masatsugu Asakawa, President, Asian Development Bank, at the ASEAN Finance Ministers’ and Central Bank Governors’ Meeting (AFMGM), 2 October 2020

Your Excellencies,

I am honored to speak today with ASEAN finance ministers and central bank governors in this virtual room. I will discuss how we can navigate the remaining risks and uncertainties caused by the coronavirus disease (COVID-19) pandemic, so that we can avert further crisis, address the underlying financial vulnerabilities, and strengthen financial resilience through closer collaboration among ASEAN countries and international organizations such as ADB.

Let me first briefly summarize ADB’s responses to the COVID-19 crisis. ADB announced a $20 billion support package on April 13, and to date has committed $11.9 billion through grant, technical assistance, and lending to both governments and private sector—42% of which went for ASEAN countries. The new financing instrument, called the COVID-19 Pandemic Response Option (CPRO), played a key role in providing quick-disbursing budget support to help governments finance their countercyclical economic stimulus packages. Out of the $8.2 billion that we committed to date for 19 countries, four ASEAN countries received in total $3.5 billion through CPRO.

Working closely with development partners is one of the key principles of our crisis response, which enabled us to mobilize about $7.3 billion in cofinancing.

Despite ASEAN’s good handling of COVID-19’s immediate impacts, the pandemic continues to pose serious risks to the economies and financial markets. Some economies have begun to reopen, but a prolonged and severe outbreak can still rattle markets and financial systems, potentially resulting in: a considerable blow to consumer and investor confidence; a sharp reversal in financial flows together with high exchange rate and financial market volatility; and undermining of long-term debt sustainability.

With these risks in mind, let me outline five key policy areas that are crucial for sustainable economic recovery and financial stability in the ASEAN region. They focus on:

i. Market confidence—through sound macro-prudential policies and adequate liquidity;
ii. Debt sustainability—through careful fiscal consolidation with strengthened domestic resource mobilization and international tax cooperation;
iii. Local capital market development—to mobilize regional financial resources.
iv. Regional financial safety nets—to enhance financial resilience; and
v. Increased use of local currencies for trade and financial transactions within the ASEAN region—to reduce overdependence on the US dollar.

Let me first turn to market confidence.  As we all remember, at the height of the pandemic in March 2020, some ASEAN countries experienced a sharp reversal in financial flows and depreciation of their currencies.

Swift global and regional monetary and fiscal policy responses eased market liquidity conditions and shored up investor confidence; but financial volatility can still return. Policy makers should remain vigilant, provide a liquidity backstop, and restore investor confidence in banking and financial systems as swiftly as possible, when necessary.

I will now move on to the second issue: ensuring debt sustainability through careful fiscal consolidation, with strengthened domestic resource mobilization and international tax cooperation.

In many of ADB’s developing member countries including ASEAN countries, the public debt-to-GDP ratio is projected to be higher in 2021 compared to the levels in 2015. This is due to large-scale stimulus expenditure programs and tax relief measures meant to address COVID-19 and the resulting economic slowdown. Tax revenue is also expected to drop.  

Once visible signs of economic recovery and greater traction of economic growth are confirmed, governments should carefully phase out their stimulus and tax relief measures to ensure debt sustainability over the medium term. The timing and speed of fiscal consolidation is crucial, and ADB can play an important role through policy advice.

In this regard, I would like to stress that strengthening domestic resource mobilization, or DRM, will be critical.

The tax-to-GDP ratios of countries in Southeast Asia was already lower than other regions even before the COVID-19 crisis. This shows that revenue generation efforts have not been keeping up with the increased economic growth.

International tax cooperation is needed to strengthen the tax base and improve tax compliance. In particular, we need joint actions to address base erosion and profit shifting, often referred to as “BEPS.”

To assist our members in these areas, ADB recently announced the establishment of a regional hub for Asia and the Pacific on domestic resource mobilization and international tax cooperation. This hub will serve as an open platform where countries and development partners can share experiences and practical knowledge. I want to encourage all of you to join the regional hub and an international conference early next year on domestic resource mobilization and international tax cooperation.

While taxation is essential for mobilizing domestic resources, issuing local currency-denominated bonds is another important avenue to tap the region’s vast savings for large development needs facing ASEAN—which brings me to the third issue.

ASEAN countries have been borrowing extensively from external sources to meet significant infrastructure investment gaps. But the region is on the whole a net saver. Deepening and broadening ASEAN’s financial markets would help mobilize regional savings to support a strong recovery and sustainable development.

Local currency bond markets have served as an effective debt funding source for fiscal spending in response to COVID-19. They also provide central banks an additional avenue for injecting liquidity to markets and cash-strapped businesses, thereby enhancing financial resilience.

Let me note that ADB’s work under the ASEAN+3 Asian Bond Markets Initiative continues to support less-developed markets. For example, ADB, together with the CGIF (the Credit Guarantee and Investment Facility), supported the creation of Cambodia’s corporate bond market and helped start government bond issuance.

In addition, green, social, and other thematic bonds can promote sustainable infrastructure and help Asia recycle its large pool of savings. I am pleased to note that ASEAN economies have been proactive in developing standards for these types of bonds, which will help in promoting the expansion of thematic bond markets.

Now, let me discuss ways to strengthen regional financial safety nets further to improve financial resilience. The COVID-19 crisis offers an opportunity to regain reform momentum for strengthening the region’s financial safety nets. In this regard, I welcome a recent agreement by ASEAN+3 finance ministers on enhancing the Chiang Mai Initiative Multilateralization, or CMIM, by: increasing the IMF De-Linked Portion from 30% to 40%; clarifying the Conditionality Framework for the IMF De-linked Portion; and institutionalizing voluntary and demand-driven local currency contributions.

I believe these measures will help the crisis responses by the CMIM to be more flexible and responsive; to extend more discretion to ASEAN+3 countries; and to strengthen coordination with the global financial safety net provided by the IMF.

At the same time, this will require further commitments from ASEAN countries to sound macroeconomic management. ADB is ready to support ASEAN to enhance the regional monitoring framework and implement necessary policy changes.

ADB also remains committed to ensuring financial stability in the region by providing financial resources to meet liquidity needs through collaboration with other development partners—as we did in previous crises.

The last issue I want to focus on is to foster usage of local currencies for trade and financial transactions within the region, in order to reduce overdependence on the US dollar. The trade invoices of ASEAN countries are largely denominated in US dollars, which are well above the actual share in exports to the US. ASEAN’s high dependency on US dollar transactions remains a source of vulnerability to external shocks.

Therefore, ASEAN economies need to accelerate efforts to bolster the use of local currencies for regional trade and investment. Some useful mechanisms include a Local Currency Settlement Framework—for sourcing local currencies of some ASEAN members when settling bilateral trade investment transactions; and bilateral currency swap lines at a predetermined exchange rate between ASEAN countries.

I’ll stop here and look forward to your questions and comments.