ASEAN Monetary Union, Debt and the EU Example
This paper looks at the perspectives for a monetary union in ASEAN from the perspective of public debt, deficits and overall leverage, and using the euro area’s experience.
Statement of Originality
This document is written by Student Alexander Krastev who declares to take full
responsibility for the contents of this document.
I declare that the text and the work presented in this document is original and that no sources
other than those mentioned in the text and its references have been used in creating it.
The Faculty of Economics and Business is responsible solely for the supervision of
completion of the work, not for the contents.
Introduction
The Association of Southeast Asian Nations is a regional political and economic organization consisting of Singapore, Indonesia, Malaysia, Brunei, Myanmar, Laos, Cambodia, the Philippines, Vietnam and Thailand. Since the 1990s, proposals were made to introduce a common ASEAN currency1, similarly to plans for several other supranational communities such as the African Union and the Union of South American Nations. Academics and ASEAN officials cite well-known arguments for monetary union – elimination of exchange rate risk, greater price stability and transparency, lower transactions costs, and ultimately cheaper goods1. The only recent example of a large monetary union is the eurozone and given its initial stability, it was seen in ASEAN as a template1. However, the eurozone government debt crisis, which has currently escalated to a danger of an uncontrolled Greek exit from the euro, is making the eurozone’s prospects uncertain and is reducing support for the formation of other currency unions; for example, UNASUR has put plans for a South American currency on hold until the members’ economies become more similar and integrated2. ASEAN also faces the question of if, and when, to adopt a common currency. The eurozone’s experience showed that because of the very high political and economic costs of breaking up a currency union of highly interconnected countries once it is constructed, members are likely to accept not only a common monetary policy different from their preferences, but also significant changes in fiscal and social policies in order to keep the common currency, for example, fiscal austerity. The sovereign debt crisis is also a driver of further integration, especially in fiscal and soon likely in tax policy3, which has large political implications, as it makes the EU considerably more ‘federal’. It is possible that an ASEAN monetary union leads to similar developments, especially if the fiscal situations of member states are so different that to harmonize them sufficiently to have a working common monetary policy, a fiscal transfer mechanism has to be created.
Worldwide, both government debts and total leverage have kept growing since the start of the financial crisis4. In most developed countries the private sector has been slowly deleveraging and the public sector has taken on new debt. However, in less developed countries, including several ASEAN states, leverage has risen substantially, due largely to household and corporate borrowing, including government-owned corporations4. Monetary policy and specifically increasing the monetary base has been repeatedly used in the US, UK, Japan, the EU and other states to buy public and some private debt securities. In addition to achieving inflation and output targets and providing liquidity following official central bank mandates, this expansionary monetary policy also reduces net government debts, interest rates on them and budget deficits. Governments, in turn, redistribute the benefits of monetization to private sector actors through bank recapitalizations, preferential loans and fiscal policies, and other measures. Through setting interest rates, central banks also influence how much new debt is taken on by economic actors, effectively also regulating private sector leverage. Although
these effects are usually not part of official central bank objectives, their significance for financial stability and solvency means they will be taken into account when making policy decisions. An ASEAN monetary union in the near future would function in this environment of budget deficits and growing overall debts with monetary policy as an important tool to control them. So, the common monetary policy of a monetary union would only be recommended if deficit and debt levels across the member states are broadly similar or converging rather than diverging. In the opposite case, monetary policy would either be too expansionary or too contractionary for some states and the common currency would be unsustainable. In the eurozone, until the sovereign debt crisis’ start in 2009-2010, fiscal convergence and the stability of the monetary union were meant to be protected by the ‘Maastricht criteria’, which stipulate that member states must not have government debts above 60% and budget deficits above 3% of GDP, but were not followed.
This paper attempts to evaluate if the ASEAN countries could form a currency union in the near future in view of their government budget balances and debts and the overall debt levels of their economies. To do so, budget surpluses or deficits and government debt ratios for the 2005-2014 period are given and compared to the Maastricht criteria that were initially the fiscal stability
benchmark of the euro area to see to what extent ASEAN states would satisfy those criteria and what the trend is. The average levels and variability among countries over this time are also calculated and discussed. The same Maastricht criteria comparison and calculations are performed for 2005-2014 inflation rates as price stability is also a goal of monetary policy, but can come in conflict with debt management. Then, the correlations of government debts, deficits and inflation between ASEAN members over the same period are calculated to identify countries or groups of countries, if any, that seem particularly fit or not to be in a monetary union. Recent GDP ratios of domestic credit to the private sector, total external debt and total debt excluding that of financial institutions, where available, are also given and interpreted. Finally, some broader possible developments of an ASEAN currency union are discussed and the paper is concluded.
Literature Review
Much of the relatively limited literature on ASEAN economic integration has been produced by international financial institutions such as the IMF or the Federal Reserve.
The IMF working paper ‘ASEAN Financial Integration’ by Almekinders et al. summarizes the
undergoing efforts to create a single ASEAN capital market integrated with the global market. They recommend the removal of remaining capital controls within ASEAN and with the rest of the world, liberalizing bank ownership rules, harmonizing standards, regulation and supervision in banking and financial markets, building the necessary communications infrastructure, improving institutional ties and other measures needed for free financial markets. In their opinion financial liberalization will lead to large capital flows into the region’s less developed countries (Laos, Cambodia, Myanmar, Vietnam), attracted by the high returns on investments, which will improve efficiency, raise incomes and lead to economic convergence. As the capital inflows and financialization resulting from financial liberalization by their nature involve increased lending and leverage, Almekinders et al. acknowledge that risk-taking may rise and cause fluctuations (for example, exchange rate instability). So, they also recommend more regional safety nets such as currency swap agreements and a future common deposit insurance scheme. In any case, the overall level of debt in ASEAN’s less developed members,
particularly in the private sector, is expected to rise due to economic and financial liberalization and so converge closer to that of the more developed states like Malaysia.
According to Aguiar et al. in ‘Coordination and Crisis in Monetary Unions’ it is not, however, certain that more similar debt levels make it more advantageous for a high-debt country to join a monetary union. The reason they give is that a union of high-debt only countries will maintain consistent expansionary monetary policies and will not be able to create unexpectedly high inflation to stimulate output and devalue debts. They also conclude that countries in monetary unions often amass more debts than they would if they were monetarily independent because of the high
incentives that they know the union central bank has to follow expansionary policies when necessary to prevent a crisis that might endanger the union, giving the familiar example of Greece and EU rescue packages and ECB QE.
K. Ngo studies the benefits and costs of an ASEAN monetary union only for Singapore, Indonesia, Malaysia, the Philippines and Thailand in ‘Benefits, Costs and Feasibility of a Monetary Union for the Association […]’, 20125. His conclusion is that even those ‘core countries’ were not ready for a common currency as of 2012 but with further integration and convergence a common currency and even a general economic and political union will be possible in the foreseeable future. Ngo uses the EU and euro area as a positive example and maintains the consensus opinion that the euro area crisis is due to the failure to follow the Maastricht criteria. The opinion expressed in his paper is that a monetary union should be complemented by a fiscal union with independent taxing and spending powers.
Data Analysis
ASEAN Government Debts as % of GDP compared to Maastricht criterion, 2005-2014*.
*Without Laos, Thailand and Cambodia for 2014.
0,0 20,0 40,0 60,0 80,0 100,0 120,0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Brunei Cambodia Indonesia Laos Malaysia Myanmar Philippines Singapore Thailand Vietnam Maastricht critierion
The government debt ratios of most ASEAN states have been declining over the past ten years and are now below the 60% ceiling. Only Laos and Singapore have higher debts, with Laos running large deficits as seen below. However, its 2014 and 2015 deficits are estimated to be lower and public debt to be stabilizing at little above 60% of GDP thanks to fast economic growth5. Singapore has a high but consistent government debt ratio and is commonly seen as a safe investment destination. As it is a major financial center, Singapore is too different from the other ASEAN members for any meaningful comparisons. Brunei is an oil and gas exporter, allowing it to consistently have large budget surpluses and almost no public debt. As of 2014, no ASEAN member state has rapidly growing or unsustainably high public debt.
Arithmetic average government debt for ASEAN, standard deviation of the government debt ratios, and the difference between the lowest and highest government debt ratios, (which are always
Brunei and Singapore), for 2005-2014.
Year 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Number of states with gov.
debt up to 60 % of GDP
6 7 8 9 9 9 9 9 8 8
The average ASEAN public debt has been stable at 40-50% of GDP. The variability between member states is also stable, indicating neither divergence nor convergence.
For comparison, the original eurozone members government debt to GDP ratios in 1998 and 2014:
Euro Country Gov Debt % GDP 1998 2014
Austria 64,8 84,5 Belgium 117,4 106,5 Finland 47,7 59,3 France 59,4 95,0 Germany 60,3 74,7 Greece 96,6 177,1 Ireland 53,6 109,7 0,0 20,0 40,0 60,0 80,0 100,0 120,0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Average St dev Highest-Lowest
Italy 114,9 132,1 Luxembourg 7,1 23,6 Netherlands 65,7 68,8 Portugal 50,4 130,2 Spain 64,1 97,7 average 66,8 96,6 standard deviation 30,5 39,6 max-min 110,3 153,5
Countries with gov debt up to 60% GDP
5 2
tradingeconomics.com
Of the 11 first euro area states and Greece, which joined in 2003, only 5 already covered the
Maastricht debt limit of 60% of GDP. After the financial crisis, by 2014 only Luxembourg and Finland of the original members were not in violation. In addition to being higher, the euro area states’ debts are more varied than at the start of the euro and differ more than ASEAN debts. So, looking at government debt only, ASEAN states are actually considerably better prepared to form a currency union now than euro area states were when they adopted the euro.
ASEAN budget balances 2005-2014.
Year 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Countries with budget deficit 8 7 6 7 3 4 5 5 6 4*
-15,0 -10,0 -5,0 0,0 5,0 10,0 15,0 20,0 25,0 30,0 35,0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Brunei Cambodia Indonesia Laos Malaysia Myanmar Philippines Singapore Thailand Vietnam Maastricht criterion
up to 3 % of GDP
*Thailand deficit expected to rise in 2014/2015.
Except for Brunei and Singapore, ASEAN states regularly have budget deficits. Only Indonesia, the Philippines, Singapore and Brunei satisfy the strict 3% of GDP requirement. However, so far ASEAN states’ inflation rates and high growth rates of 6-8 % annually have prevented the deficits from increasing government debt ratios, so if ASEAN were to adopt a maximum budget deficit rule, a limit of around 5% of GDP would be more appropriate. In that case only Laos would likely not qualify. So, in view of their stage of development, ASEAN states’ fiscal policies do not convincingly make them appropriate or inappropriate for a currency union.
Similarly to government debts, the variability of budget deficits of ASEAN members is relatively constant and does not demonstrate clear convergence or divergence of fiscal policy and the consequent increase in the benefits or costs of a common currency.
tradingeconomics.com
ASEAN states inflation 2005-2014 -10,0 -5,0 0,0 5,0 10,0 15,0 20,0 25,0 30,0 35,0 40,0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Average St dev Max-min
Inflation in most member states, including all that had significant inflation problems, has clearly been falling and stabilizing over the last decade. All 10 countries currently have inflation rates of no more than 7%, which are normal values for less developed nations like the highest-inflation members Indonesia and Myanmar. Both of those do not have high public or total debt burdens and should be able to adjust to moderately more conservative monetary policy under a common authority. Inflation rates in ASEAN are also visibly converging over time.
Year 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Average of 3 lowest 1,5 1,6 1,7 4,3 -0,5 1,6 3,0 1,0 1,6 0,9 -5,0 0,0 5,0 10,0 15,0 20,0 25,0 30,0 35,0 40,0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Brunei Cambodia Indonesia Laos Malaysia Myanmar Philippines Singapore Thailand Vietnam Reference value 0,0 5,0 10,0 15,0 20,0 25,0 30,0 35,0 40,0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Average St dev
Reference value (maximum) 3,0 3,1 3,2 5,8 1,0 3,1 4,5 2,5 3,1 2,4 Number of countries under
Ref value inflation
3 2 5 3 6 3 3 3 6 3
The euro area requirement for maximum annual inflation equals the average of the three lowest inflation rates in the eurozone plus 1,5%. ASEAN inflation rates are too variable for participating in a monetary union by this measure, with only Brunei, Singapore and Thailand satisfying it.
Other debt measurements
Country Domestic credit to private sector 2014 %GDP
External debt 2013 %GDP total
Total debt % GDP 2013 ex-financials;
Brunei 32,9 11,0 33 Cambodia 54,3 31,4 73 Indonesia 40,1 25,8 88 Laos 39,1* 66,2 100 Malaysia 124,7 32,0 222** Myanmar 13,6* 9,1 55 Philippines 39,2 26,8 75 Singapore 131,5 430,0 382 Thailand 158,9 35,6 187 Vietnam 100,3 40,2 146 * for 2013 ** for 2014
world bank, mecometer.com, mckinsey, ‘financial integration in asean’
In contrast to their similar fiscal situations, ASEAN states have very different levels of total external debt and total non-financial-institutions debt, so their financial systems will require different policies. If a serious financial crisis involving numerous bankruptcies occurred in Singapore, for example, its gross external debt of 430% of GDP and non-financial debts of 382% of GDP would make extremely accommodative monetary policy (large increases in the monetary base) necessary there just to maintain some financial stability. Under a currency union, this would be highly disadvantageous to Indonesia or Myanmar, as they would only be indirectly affected and likely would need less monetary easing.
Additionally, non-financial sector debt to GDP has grown at a fast pace in some countries, increasing by 43% of GDP in Thailand and 49% of GDP in Malaysia for the 2007-2014 period. This has caused some officials worried about the effects of rising global interest rates on leveraged economies to warn that it is necessary to tighten policy and reduce debts, particularly booming household mortgages supporting the rising real estate prices. Under a common currency this would
unnecessarily slow down the economies of less developed and leveraged members like Myanmar, Laos and Cambodia. So, current economic developments demonstrate that in the private sector in particular, ASEAN economies are still at too different stages of development and react too
asymmetrically to global shocks for a currency union to be feasible in the immediate future.
There are two clearly visible groups of countries within which government debt ratios are positively correlated and so monetary policy responses working to or through purchasing government debt securities will have more symmetric effects: Malaysia, Vietnam, Singapore, Brunei and Thailand; and Cambodia, Laos, Thailand, Indonesia, the Philippines and Myanmar. Thailand’s government
indebtedness has relatively small positive correlations with that of all other countries
Budget deficit correlations
The budget deficits or surpluses of most pairs of countries are positively correlated, indicating similar responses of fiscal stimulus or contraction to global and regional economic developments, and perhaps a degree of unofficial policy coordination. Myanmar and Laos seem to follow more independent fiscal policies but the likely reason for that is simply that their economies are more closed and isolated from outside influences than their neighbors’ economies and so the desired policy is also different. These results might support the idea that Myanmar and Laos are less suitable for a common currency than other ASEAN states.
Vietnam 0.7713 -0.3823 -0.5669 -0.2313 0.6871 -0.6329 -0.5819 0.6505 0.4332 1.0000 Thailand 0.0230 0.3477 0.0698 0.2544 0.4644 0.1056 0.3421 0.5302 1.0000 Singapore 0.7430 -0.5080 -0.7341 -0.6094 0.9096 -0.6653 -0.3291 1.0000 Philippines -0.8055 0.8109 0.8333 0.6137 -0.5442 0.8636 1.0000 Myanmar -0.8800 0.9385 0.9508 0.7481 -0.7395 1.0000 Malaysia 0.8017 -0.5384 -0.8262 -0.6201 1.0000 Laos -0.6701 0.7775 0.8772 1.0000 Indonesia -0.8810 0.8898 1.0000 Cambodia -0.7445 1.0000 Brunei 1.0000 Brunei Cambodia Indone~a Laos Malaysia Myanmar Philip~s Singap~e Thailand Vietnam
Vietnam 0.6272 0.8228 0.5758 0.3176 0.7177 0.2273 0.4866 0.6396 0.9356 1.0000 Thailand 0.5764 0.7689 0.5568 0.2173 0.7336 0.1293 0.3879 0.6156 1.0000 Singapore 0.5167 0.8932 0.4548 0.5435 0.6752 0.2851 0.7582 1.0000 Philippines 0.5606 0.7303 0.0395 0.0406 0.7613 0.5190 1.0000 Myanmar 0.2048 0.4906 -0.2460 -0.2064 0.5612 1.0000 Malaysia 0.5791 0.7832 0.0748 -0.0972 1.0000 Laos 0.1517 0.3451 0.5658 1.0000 Indonesia 0.5789 0.4696 1.0000 Cambodia 0.5162 1.0000 Brunei 1.0000 Brunei Cambodia Indone~a Laos Malaysia Myanmar Philip~s Singap~e Thailand Vietnam
Inflation correlations
The fact that all country pairs except one have positively correlated inflation rates, and the
correlations are so high, might indicate that price levels in ASEAN members are more influenced by common global economic shocks than by domestic fiscal and monetary policy. This shows ASEAN economies overall are already quite open and further integration within ASEAN and with the world economy can be expected to result in a high level of convergence.
Further Discussion
In light of the Greek bankruptcy, and , according to some, near exit from the eurozone, which is currently dominating financial news, it is worth it to consider if and how a similar scenario could play out in ASEAN once it has a monetary union. As discussed in Almekinders et al, financial instability often follows excessive lending to newly booming markets, as was the case with Greece. With the more authoritarian and less developed nations of Laos, Myanmar or Cambodia opening up to investment and capital flows, it is possible, especially in the case of a monetary union, that excessive capital inflows are allowed to enter those economies, leading to an eventual catastrophic
deleveraging. Thus the prosperity and success of ASEAN states in a currency union might depend on avoiding excessive borrowing by the governments or even the private sector in the future. In the opposite scenario ASEAN would likely face the same dilemma of further integration to save the monetary union or damaging disintegration that the EU currently faces.
Conclusion
The aim of this paper was to assess the prospects for an ASEAN currency union with a focus on fiscal and debt factors. The results are not very conclusive, but so far ASEAN states do not seem similar enough in those respects to justify a common currency. However, with the development and financialization of less developed countries in the community, further convergence will likely occur and an ASEAN monetary union should be more feasible in 10 or 15 years. Further research should
Vietnam 0.8785 0.7750 0.1166 0.5053 0.6298 0.2980 0.6268 0.8603 0.5689 1.0000 Thailand 0.3484 0.6790 0.6434 0.9120 0.7787 0.3942 0.6520 0.4705 1.0000 Singapore 0.6190 0.6182 -0.1933 0.4370 0.4030 0.1471 0.2673 1.0000 Philippines 0.5568 0.7685 0.6876 0.4601 0.8034 0.3032 1.0000 Myanmar 0.2770 0.6525 0.4861 0.2924 0.4949 1.0000 Malaysia 0.4177 0.8361 0.6875 0.7181 1.0000 Laos 0.3209 0.5314 0.5200 1.0000 Indonesia 0.0597 0.4605 1.0000 Cambodia 0.5942 1.0000 Brunei 1.0000 Brunei Cambodia Indone~a Laos Malaysia Myanmar Philip~s Singap~e Thailand Vietnam
focus on how to prevent current and capital account imbalances similar to those in the euro area fro appearing threatening the existence and prosperity of the monetary union once it functions.
1. http://www.asean.org/resources/2012-02-10-08-47-56/speeches-statements-of-the-former-secretaries-general-of-asean/item/towards-asean-financial-integration 2. http://en.mercopress.com/2011/06/13/unasur-looking-at-the-eu-freezes-project-for-common-currency-and-central-bank 3. http://wcfia.harvard.edu/files/wcfia/files/fwasserfallen_political_and_economic_integration.pdf 4. http://www.mckinsey.com/insights/economic_studies/debt_and_not_much_deleveraging 5. http://www.coface.com/Economic-Studies-and-Country-Risks/Lao-People-s-Democratic-Republic 6. http://www.tradingeconomics.com 7. http://data.worldbank.org 8. http://scholar.harvard.edu/files/gopinath/files/monetary_union_may_2015.pdf 9.mecometer.com 10. http://www.asean.org/resources/2012-02-10-08-47-56/speeches-statements-of-the-former-secretaries-general-of-asean/item/towards-asean-financial-integration
