SINGAPORE (Oct 14): An Asean or Asia with freer movement of labour, capital, goods and services. That is what Malaysian Prime Minister Dr Mahathir Mohamad is championing in his push for a common trading currency in East Asia. Speaking at The Future of Asia conference in May, sponsored by Nikkei, he said: “In the Far East, if you want to come together, we should start with a common trading currency.” He added that such a currency was “not to be used locally, but for the settling of trade”.
And, to ensure the stability of this currency, he suggested that it be pegged to gold instead of another currency such as the US dollar. This, he said, would ensure that it would be less -reactive to geopolitical tensions.
His comments on the need for greater unity, particularly in Asean, come amid great global economic uncertainty brought on by the ongoing US-China trade tensions, electronics slowdown and oil jitters. Asean countries, particularly the export-oriented ones like Singapore, have been under pressure because of their open economies. With its 2Q2019 growth of 0.1%, Singapore faces the risk of a technical recession, defined as two consecutive quarters of negative growth.
And so, a more unified Asean will benefit from its population of more than 600 million, GDP of around US$3 trillion ($43.14 trillion) and a large domestic market in the form of a rapidly rising middle class. If it were a country, Asean would rank No 8 among the world’s largest economies by GDP. The purpose of the Asean Economic Community (AEC) — mooted in 2003 and set up in 2015 — is to accelerate economic growth and enhance trade development in the region by facilitating the seamless movement of goods, services, skilled labour and capital.
The AEC Blueprint 2025 delineates goals to achieve full economic integration. This involves, and will lead to, greater regional and sectoral connectivity and cooperation, as well as a more resilient and inclusive people-centred community. The challenge is to meld together the diverse and diverging states of economic development among the Asean 10.
Economists say greater regional collaboration can help mitigate the economic impact of global shocks such as the current slowdown. Euben Paracuelles, chief Asean economist at Nomura, notes that there is an urgent need for countries in the region to work more closely to shield themselves from increased trade protectionism and falling global trade.
Yasuto Watanabe, deputy director of the Asean+3 Macroeconomic Research Office (AMRO), agrees, adding that economic integration within the region today is an improvement from what it was 20 years ago, owing to “stronger trade ties and the huge volume of commercial transactions”. However, he notes that financial integration is lagging behind the achievements made in the fields of trade and investment because of the region’s prolonged overreliance on the US dollar.
Unified currency
Having a common trading currency will “upgrade the Asean/Asian region’s financial architecture to match the integration made in other sectors”, notes Watanabe. Like Mahathir, he thinks it will facilitate intra-regional trade and investment because countries can bypass the hassle and possible drop in value involved in changing their domestic currency to the US dollar and, finally, the currency of their trading partner. It will also shield the region from external shocks amid the bleak global economic outlook, as it provides “crisis financing liquidity”, Watanabe adds.
For now, Asia has a multitude of growth opportunities to explore, owing to heightened domestic consumption by its growing middle income population, Naoyuki Yoshino, dean of the Asian Development Bank Institute, tells The Edge Singapore. He says greater financial integration in the region will be crucial to strengthen its potential, by allowing it to reap stronger economic growth. “In the past [early 1990s], Asia was very much dependent on the US and Europe for growth — companies used to manufacture their products here and assemble the final products in their home country. But now, Asia is more developed and has the ability to manufacture, produce and consume its own products.” He adds that a more unified currency will enable each of these countries to have a more free-flowing exchange of goods and services.
Yoshino, however, warns that there are several complications to a common trading currency, owing to the great differences in trading patterns and demographics of each Asean country. “The Asean countries have a lot of differences in their industrial structure and culture, making a common currency unsuitable.” He adds that there are differences in the countries’ consumption patterns.
To still reap the benefits of a common currency, Yoshino suggests that countries in the region adopt a basket of currencies to base their currencies on. The basket system, which is used by Singapore, assigns weights to key trading partners, based on the frequency and intensity of trade. Countries that adopt this system can have a common list of countries they have high trade volumes with and assign similar weights; countries that trade more with other nations can adjust the weights accordingly and/or add more currencies to their basket.
This way, participating countries’ currencies will move more in tandem with each other, thereby allowing for greater financial integration and a freer flow of goods and services across borders, owing to a confluence in terms of their price values. “This system will give countries similar benefits [as those that have] a common currency,” notes Yoshino, adding that the participating nations can move to a full-fledged common currency once the weights and currencies in each of their baskets are the same.
Such a system will ease the countries towards greater financial integration, rather than forcing it upon them when they are not ready for it. Nomura’s Paracuelles says with the different fixed exchange rate regimes across Asean/Asian countries, some countries, especially the bigger ones, may be unwilling to adopt a common currency immediately because they will lose the flexibility to adopt policies that better suit their economic circumstances. For instance, in the European Union, in the aftermath of the global financial crisis, Germany ended up feeling the drag of the poorly performing economies in Portugal, Italy, Ireland, Greece and Spain.
Steps ahead
A system based on a basket of currencies will be a challenging one for countries to transition to. Paracuelles and Yoshino expect it to take three to five years, owing to the inherent structural reforms that need to be made to the countries’ exchange rate and fiscal regimes.
In the meantime, Paracuelles says Asean states can start by increasing their trade with each other, since “the 10 Asean states are not trading as much as they should with each other, even though there are no tariff barriers hindering such trade”. He notes that in spite of the 50-year ties binding the region, its present-day intra-regional trade of 25% pales in comparison with the 60% among countries in the EU bloc.
Yoshino is of the same opinion. He says those in the Asean/Asian region should deepen their mutual trade relations by leveraging existing free trade agreements and signing more such agreements with one another, to ensure the transition to a more unified currency system.
He adds that they can go a step further by creating clear zones of comparative advantage, whereby countries can trade based on their specialisations. For example, Singapore can be a mediation hub, Vietnam a manufacturing hub and the Philippines a pharmaceuticals specialist — that way, there will be less competition among the countries and a more seamless exchange between them.
With the world becoming smaller and with the shift towards Asia for global growth, a stronger and more integrated financial system among Asian/Asean countries will certainly bear fruit by deepening the region’s growth and cushioning it from external shocks. And, as Mahathir says, it may prevent another financial crisis such as the one in 1997.
From ECU to euro
For how to model a single currency, Asean could look to the European Union (EU). The euro, now the second most-used currency after the US dollar — was 20 years in the making. The euro’s predecessor was the European Currency Unit (ECU), which was introduced in 1979, along with the exchange rate mechanism. The ERM’s aim was to reduce exchange rate volatility and achieve stability before member countries moved to a single currency.
The ECU was a composite artificial currency based on a basket of 12 EU member currencies, weighted according to each country’s share of EU output. The currencies were the Belgian franc, the German mark, the Danish krone, the Spanish peseta, the French franc, the British pound sterling, the Greek drachma, the Irish pound, the Italian lira, the Luxembourgish franc, the Dutch guilder and the Portuguese escudo. (The sterling was withdrawn from the ERM in 1992, and in 2016 the UK voted to leave the EU.)
On Dec 31, 1998 — the eve of the birth of the euro — the official ECU exchange rates of the EU currencies were calculated by a certain formula comprising the multiplying of the USD/ECU exchange rate by their respective exchange rates vis-à-vis the US dollar. The resulting ECU exchange rates (that is, units of currency per ECU) were rounded to the sixth significant digit. This calculation was performed for all EU currencies, including those not ECU components. This worked out to 1.1667521 as the rate of the euro for its first day of use.
Today, the EU has an enlarged membership of 27 countries, of which 19 use the euro. Countries such as Andorra and Kosovo, which are not part of the EU, also use the euro. The number of countries that plan to use the euro continues to rise. Romania plans to start using the currency in 2022, and Croatia in 2024.
In addition, a further 13 countries that do not use the euro are part of the Single Euro Payments Area, which allows simplified bank transfers. Norway, Sweden, Denmark, Switzerland and Liechtenstein are among the countries in SEPA.
The US dollar last traded against the euro at 1.10. Against the euro, the greenback has been as weak as 1.6037 during the global financial crisis and as strong as 0.8225 in 2000.
