ASEAN braces for risks of ‘deglobalization’

Inflation rates in several member states were also expected to remain high due to elevated input prices, increased demand for services and continued currency pressures.

Aditya Hadi

Aditya Hadi

The Jakarta Post


Delegates from ASEAN member states pose for a “family photo” on Aug. 25, 2023, during the second ASEAN Finance Ministers’ and Central Bank Governors’ Meeting in Jakarta. PHOTO: FINANCE MINISTRY/THE JAKARTA POST

August 28, 2023

JAKARTA – ASEAN member states have vowed to increase trade among themselves while attracting more infrastructure and green financing to protect the region from a global economic slowdown and rising geopolitical risks.

At the opening session of the ASEAN Finance Ministers’ and Central Bank Governors’ Meeting (AFMGM) on Friday, Finance Minister Sri Mulyani Indrawati said geopolitical tension was causing uncertainty and could worsen, pointing out that all ASEAN member states felt the tension between the United States and China.

“This could cause the world to become even more fragmented. The issue or term ‘deglobalization’ is, in fact, becoming ever more frequently mentioned by policymakers and economists,” she added.

Addressing a press conference afterward, the finance minister also noted that slower-than-expected growth in China and downside risks to the US economy next year might affect exports from the region.

“Thus, the focus of this meeting was [about] how ASEAN could create resiliency,” she said.

The second AFMGM under Indonesia’s 2023 ASEAN presidency noted that the region continued to be a “bright spot” amid subdued global growth, underpinned by resilient domestic demand and continuing recovery in the tourism industry.

It stressed that ASEAN member states needed to remain vigilant, however, given the slightly lower growth outlook of 4.5 percent for this year due to weakening export demand. Inflation rates in several member states were also expected to remain high due to elevated input prices, increased demand for services and continued currency pressures.

According to Sri Mulyani, these factors underscored the importance of strengthening the macroeconomic policy mix, which would enable member states to use all available tools to ensure economic stability, rather than just interest rates.

“We need to ensure stability at the macro level, which means that the fiscal and monetary directions need to be synchronized,” said the finance minister.

She also stressed the need to monitor the region’s financial stability, despite a statement from the ASEAN+3 Macroeconomic Research Office (AMRO) characterizing regional finances as quite stable.

“We must not take it for granted. Policymakers need to look at all potential vulnerabilities in the financial sector,” Sri Mulyani said.

She further explained that the geopolitical tension between the US and China could provide opportunities for foreign direct investment (FDI), as other countries could choose to relocate businesses to ASEAN destinations.

“There is capital outflow here, but also inflow in terms of FDI,” she said. “ASEAN and India are two regions that are seen as potential beneficiaries from this situation.”

To capitalize on this potential, however, Sri Mulyani said ASEAN members needed to use all instruments to create a climate conducive to trade and investment.

“Within ASEAN, we should collaborate. Sometimes we also compete, but the competition [should be done] in a healthy way,” she said.

She also highlighted the importance of regional trade and how agreements on local currency transaction (LCT) signed during the AFMGM could be catalysts for intensified trade.

On Friday, Bank Indonesia, the Bank of Thailand and Bank Negara Malaysia agreed to expand their LCT deals to cover settlements for not only trade and investment but also financial products payments and purchases.

The second AFMGM also saw Vietnam’s inclusion in a memorandum of understanding (MoU) on regional payment connectivity (RPC) signed last year by Indonesia, Thailand, Malaysia, Singapore and the Philippines. The RPC framework lays out design and testing mechanisms to integrate a variety of payment methods, such as QR code, real-time gross settlement (RTGS) and fast payment systems.

Green financing potential

The major structural issues that ASEAN members needed to address, Sri Mulyani said, were infrastructure and the energy transition. While these could both stoke economic growth, financing them could be tricky, she said.

“The infrastructure sector in ASEAN needs US$280 billion of financing per year. However, this cannot be met by the existing public and private funds, as there is still a $19 billion gap per year,” Sri Mulyani explained.

Discussions during the AFMGM therefore focused on how ASEAN could mobilize infrastructure financing from outside the region, she said.

To enhance the credibility of infrastructure projects in the eyes of international investors and to attract more interest from green financing partners, the meeting endorsed repositioning the ASEAN Infrastructure Fund (AIF) as a green fund.

The bloc’s members agreed to align the AIF with the newest version of the ASEAN Taxonomy for Sustainable Finance, to involve multiple parties as lead cofinanciers, to conduct a wider study on the fund’s contributions to recapitalization, and to optimize existing capital, including through asset recycling.

“The ASEAN Taxonomy version 2 serves as an example of how we work to enable a just, affordable and orderly transition. It is the first in the world that classifies the energy transition as a new green classification,” Sri Mulyani added.

The new taxonomy would clearly define green projects as part of the energy transition while also providing assurances against accusations of greenwashing, but she stressed the ASEAN taxonomy’s interoperability with similar classifications in other regions.

“It is a much-discussed topic, so it’s impossible to create a taxonomy just for ASEAN. The classification must be interoperable with other taxonomies. If that happens, financiers will feel confident about entering the region,” she said.

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