Variety of risks, challenges to financial stability in ASEAN+3: AMRO

Since December 2023, financial risks in the region have evolved: while some risks like high inflation have subsided, others like geopolitical tensions have intensified, the report observed.

AMRO contributes toward securing macroeconomic and financial stability of the ASEAN+3 region, comprising 10 members of the Association of Southeast Asian Nations (ASEAN) and China, Hong Kong, Japan and South Korea.

Though the US Federal Reserve (Fed) commenced its monetary easing in September that led to an easing of monetary conditions, uncertainties around inflation and growth outlook linger, it said.

Moreover, the geopolitical situation in the Middle East remains fragile and the result of the upcoming US presidential election remains a major source of uncertainties for financial markets, it said.

The region remains vulnerable to macro-financial shocks from major advanced economies and other external factors, while the growing interconnectivity of ASEAN+3 financial systems underscores the need to take a holistic macroeconomic and financial view of the region to safeguard against systemic risks.

“Overall, the risk to financial stability across ASEAN+3 in 2024 appears 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 in a release.

The region’s heavy reliance on the US dollar for cross-border financial activities poses two major risks: a potential shortage of US dollar funding, which could destabilise financial markets and intermediaries; and the transmission of global shocks through the US dollar, particularly during periods of monetary tightening or geopolitical tension.

To strengthen resilience against external shocks in a dollar-dependent environment, ASEAN+3 economies should reinforce their economic and financial fundamentals, enhance surveillance frameworks for monitoring US dollar liquidity, fortify macro-prudential measures for banks and non-banking financial institutions, and provide financing support to member economies experiencing US dollar liquidity stresses, the report suggested.

Furthermore, reducing structural reliance on the US dollar in the medium to long term by promoting the use of local currencies and developing cross-currency payment systems should be a key priority.

Fibre2Fashion News Desk (DS)