ASEAN+3 economies should build up their resilience against the movement of US dollar given the region’s heavy reliance on the greenback for cross-border financial activities that could pose a significant risk to the respective financial markets, in addition to adopting measures aimed at strengthening economic fundamentals and regional collaboration, reported the ASEAN+3 Macroeconomic Research Office (AMRO).
The over reliance on US dollar could be highly risky as the fluctuation and inadequate funding of the dollar could destabilise the financial markets, and global shocks could be transmitted through the currency, particularly during periods of monetary tightening or geopolitical tension.
In order to guard against external shocks in a dollar-dependent environment, ASEAN+3 economies should enhance their surveillance framework to monitor US dollar liquidity, making sure that the necessary financing support is available for member economies experiencing liquidity stress. Additionally, the regional economies should promote the use of local currencies and develop cross-currency payment system.
AMRO today launched its ASEAN+3 Financial Stability Report (AFSR 2024), which analyses the latest market development and potential risk factors within the region, while offering policy recommendation to tackle key challenges confronting the region.
“Overall, the risk to financial stability across ASEAN+3 in 2024 appears to be lower than in 2023. The current climate of robust growth and disinflation presents regional policymakers an opportunity to reduce debt, rebuild policy space, and strengthen fiscal capacity to better manage potential shocks. Replenishing foreign exchange reserves during times of capital inflows can further enhance market confidence and provide a buffer against extreme market volatility,” said AMRO Chief Economist, Hoe Ee Khor.
Since December 2023, financial risks in the ASEAN+3 region have largely shifted away from high inflation and high interest rate. Currently, in addition to brewing geopolitical tension, the region is posed with a wide range of newly-emerged risks and challenges that can threaten the region’s financial stability in the near- to long-term.
In the near term, ASEAN+3 economies should remain vigilant against the risk of resurgent inflation, escalating geopolitical tension, and global economic slowdown. Some critical measures that can help build such vigilance include the strengthening of cross-border surveillance and data sharing, the assessment of regional stress-test level, the enhancement of supervision on host markets, and lastly, the upgrade of the regional financial safety and security net.
One key sector taken into consideration is the property market. Effective measures aimed at stabilising the property sector should be implemented to prevent fundamentally sound companies from defaulting as a result of tight credit conditions driven by market failure. At the same time, financial institutions, especially smaller banks and non-bank financial intermediaries, with significant exposure to property market risk need to raise the standard of their corporate governance to be at par with the highest standards.
