The negative impact of the global financial crisis has been felt in 2008 by the majority of the SEACEN countries. Capital inflows are slowing down and capital reversal is increasing due to the liquidation of assets by foreign investors to deleverage their parent companies. This has put downward pressures on the domestic currencies of the SEACEN countries and has also been associated with declining foreign exchange reserves due in part to central bank intervention to increase foreign currency liquidity.
With a view to minimise the negative impacts of the ongoing global financial crisis, central banks and the governments of the SEACEN countries have implemented various policy measures. Key policy measures include lowering interest rates to ease the effect of the financial market turmoil and avoid a severe contraction of economic activity; banning short-selling and implementing a circuit-breaker to contain the mounting pressure on equity markets; enhancing existing repurchase agreement facilities through relaxed valuation and a broader list of acceptable collateral; intervention of the foreign exchange market; policy coordination between government and the central bank to mitigate financial market panic; shoring up market confidence through timely communication on developments and policy changes; implementing deposit insurance to fully guarantee deposits in the banking system; and, coordinating at regional level to share information, discuss emerging developments, and pool resources, particularly foreign exchange reserves (See Box No. 3 for detail).
Box No. 3: Policy Measures Implemented Recently
Country Trends
New measures introduced by the National Bank of Cambodia included increasing the reserve requirements and imposing a cap on bank lending. These measures are aimed to reduce excess liquidity in the banking system and to limit banks’ exposure to the real estate sector. Since the measures have been effective only in July, it is still premature to give a good assessment of their impact. However, there are some indications that the level of bank excess liquidity has been reduced.
Indonesia has implemented several policies in 2008 to manage capital flows. One of them is the intensified policy coordination between the government and Bank Indonesia which includes setting an auto rejection of transactions when prices fall below 10% to mitigate the fall in the stock market. Meanwhile, the Indonesian government has committed to buy back government bond (SUN) to improve liquidity. Furthermore, to reduce potential losses, Bank Indonesia and the Indonesian Institute of Accountants gave freedom to holders of securities to establish a fair value for securities, including SUN-owned by banks. Also, in an attempt to ensure sufficient liquidity in the economy, the Indonesian government has placed its fund in state owned banks, while Bank Indonesia lowered the reserve requirement ratio for both domestic currency and foreign currency deposits.
The Korean government, that is the Ministry of Strategy and Finance, held the South Korean currency down on behalf of exporters. The results were not as the government has anticipated as depreciation of the won did not improve the current account but instead raised consumer prices. The Ministry of Finance and Bank Negara Malaysia jointly announced pre-emptive and precautionary measures to maintain the stability of the Malaysian financial system in October 2008. These measures include full guaranteed of all ringgit and foreign currency deposits with banks and financial institutions until December 2010; extension of access to Bank Negara Malaysia’s liquidity facility to insurance companies and takaful operators; reduction in corporate income tax rate; fine-tuning of customised tax and non-tax incentives to promote specific industries; generous tax incentives and flexibilities to invest and operate in the 5 economic corridors; and reduction or improvement in processes, procedures, legislation and human resources in the public sector to reduce costs of doing business. The BSP has been implementing various measures to ensure the soundness and stability of the banking sector, strengthen the public’s trust and confidence in the financial system, and guard against systemic risks that could arise from a sudden stop or reversal of capital flows. The measures implemented include ensuring adequate peso and dollar liquidity by enhancing existing peso repo facilities, establishing the US$ repo facility, maintaining a presence in the spot and swap markets by selling dollars, Cambodia
Indonesia
Korea
Malaysia
reducing reserve requirement and providing directed relief to banks. These measures along with the concerted efforts in the regional and international fronts by central banks and financial agencies have helped stabilised the financial markets. The peso recovered from a 22-month low of P49.58/ US$1 on 28 October 2008 to P48.08/US$1 on 6 November 2008. The benchmark Philippine Stock Exchange Index reached a four-year low of 1,704.4 index points on 28 October 2008, but recovered subsequently. The Government has opened the Rupee denominated Treasury bill market for foreign investors since May 2008 and are permitted to invest up to 10% of the value of Treasury bills outstanding at any given point of time through the primary market. Domestic Banks are allowed to accept time deposits from nonresidents in foreign currencies. Similarly, migrants’ transfers have been relaxed by allowing a transfer of foreign exchange equivalent to US$150,000. These new series of initiatives are designed to promote international investor confidence, secure comparative advantages by moving to global financial markets and to further mobilise foreign savings to address the country’s domestic savings-investment gap. In March 2008, the Financial Supervisory Commission (FSC) allowed insurance companies to issue policies denominated in US dollar; the Executive Yuan relaxed the calculation base of domestic firms’ direct investment ceiling in Mainland China; and the FSC raised insurance company’s foreign investment ratio of its insurance funds from 35% to 45%, and allowed them to invest in foreign private equity funds and overseas real estates. In July 2008, the government allowed Mainland Chinese to invest in domestic industries and securities market. And in October 2008, the government announced the full deposits insurance scheme that covers foreign exchange deposits. This will attract residents not only to maintain but also to attract foreign deposits back into Taiwan. The key policies in 2008 included the removal of the unremunerated reserve requirement (URR) measure which was implemented in December 2006 to discourage short term speculative inflows. In March 2008, when the Baht movement became much more stable and the economic growth momentum became more stable, the BOT decided to remove the capital flow regulation measure. Additionally, further capital liberalisation aimed at promoting private portfolio investment abroad to reap more international diversification benefits was carried out by increasing the limit on overall outflow by qualified institutional investors from US$10 Billion to US$30 Billion in March 2008. Initially, the actual outflows increased in response to the increased limit but it slowed down sharply in Q3 of 2008 due to the unfavorable conditions in the global financial markets and higher risk aversion of Thai investors.
Key measures implemented by Vietnam in 2008 in order to manage capital flows include expansion of daily trading exchange rate band to realise a flexible exchange rate regime in line with the demand and supply for foreign currencies in the market as well as to prevent speculations; and adjustment of prime interest rate, discount rate and refinancing rate to cope with the negative impacts of the international financial crisis on Vietnam’s economic growth.
Sri Lanka
Taiwan
Thailand
Vietnam