Economic integration

Growth in currency swaps reflecting greater economic integration in East Asia

Currency swap agreements are proliferating in the region as a means of facilitating trade and stabilizing financial markets, and reflect the growing trend of economic integration, said the ASEAN+3 Macroeconomic Research Bureau ( AMRO).

Bilateral swap agreements (BSAs) in the ASEAN+3 region amounted to $381.6 billion, up 15% compared to the end of 2020.

ASEAN+3 represents the 10 members of the Association of Southeast Asian Nations, plus China, South Korea and Japan.

Bilateral currency exchanges essentially clear loans between parties, with each party holding funds in the currency of the exchange partner.

It is believed that the ownership of a partner currency by a swap participant facilitates bilateral trade while improving the liquidity of its banking system.

The implied valuation of virtual loans also helps establish a benchmark for currencies, which could help stabilize currency markets in a crisis.

The bulk of the region’s trade involves People’s Bank of China agreements with the Hong Kong Monetary Authority, Bank of Korea and Bank of Indonesia, AMRO said in a note on Thursday.

Japan’s Ministry of Finance has entered into a $12 billion currency swap deal with Bangko Sentral ng Pilipinas (BSP), which represents just over 3% of the total in the region.

“Trade between ASEAN-5 countries (Indonesia, Malaysia, Philippines, Singapore and Thailand) highlights the objectives of facilitating local currency settlements in trade and investment and stabilizing financial markets; given the deeper integration of trade and finance between these economies,” AMRO said.

The Philippines and Japan renewed the currency swap agreement to support financial stability and regional cooperation, the BSP said in January. Both parties can exchange their currencies for dollars, while the Philippines can exchange pesos for yen.

The limits of the swap deal remain at $12 billion or the yen equivalent for the Philippines, while Japan can swap up to $500 million.

PASB said the bilateral agreement with Japan reflects changes to the ASEAN+3 Chiang Mai Initiative Multilateralization Agreement, which strengthened coordination with the International Monetary Fund.

“The Philippines has access to similar facilities such as the Chang Mai Initiative as well as other hotlines with multilateral institutions. While having these swap lines in place will not hurt, I believe the Philippines is well positioned and has adequate provisions in place to deal with a potential liquidity crisis,” said Nicholas Antonio T. Mapa, senior economist at ING Bank NV Manila, in an email. mail.

“It would be beneficial to have such arrangements as additional safeguards in the future, but it may not be an immediate need at this time.”

AMRO said the BSAs serve various purposes, including alleviating pressure on currency funding markets, alleviating balance of payments needs, facilitating trade and investment, and promoting the internationalization of currencies. — Jenina P. Ibanez