Economists disagree with Moody’s over CMIM changes

The rating agency considers the Chiang Mai Initiative’s decision to double its regional emergency reserve pool to be credit positive, but economists believe that the system remains highly flawed.

  • 16 May 2012
Email a colleague
Request a PDF

Moody’s believes that the doubling of the regional emergency reserve pool of the Chiang Mai Initiative Multilateralisation (CMIM) will benefit the region’s frontier economies, but economists disagree.

The CMIM is a currency swap arrangement that was launched in March 2010 after a decade of discussion following the Asian financial crisis in 1997-1998. The idea behind the scheme is to make funds available to member states in the event of a balance of payments crisis or a loss of market access.

On the sidelines of the recent Asian Development Bank (ADB) annual conference in Manila on May 3, representatives from the 13 countries agreed to double the reserve pool from US$120 billion to US$240 billion.

They also agreed that any participant would be able to access up to 30% of the pool without a parallel International Monetary Fund (IMF) programme. This was an increase from 20%, and it has been speculated that it could be raised further in 2013 to 40%.

According to a report released by Moody’s on May 14, the developments are credit positive for the region’s weaker sovereign credits, such as Vietnam (‘B1’ negative), Cambodia (‘B2’ stable), Myanmar (unrated) and Laos (unrated).

“Our calculations suggest that the frontier economies in the region, those that are unrated or rated ‘B1’ or lower would benefit significantly,” according to Tom Byrne, senior vice president of Moody’s sovereign risk group.

“A regionally based support mechanism would provide more timely support in the event of an incipient crisis. In addition, a regional sovereign may consider that seeking such support would be less fraught with negative political implications.”

However, economists are highly sceptical that the CMIM in its current guise would be any use to frontier nations at all.

“The main constraint that I see is that in its current configuration its not really set up to be used. With only 30% of a country's quota available without an IMF program, it’s not attractive. This is the irony of it all, because still operates almost like a co-financing mechanism of the IMF, rather than an alternative to it,” said Jayant Menon, lead economist in the office of regional economic integration at the ADB.

“In order for it to be a success they’d either have to expand it considerably or loosen the rules and regulations. Otherwise in the end while it’s nice to have [the CMIM] for political reasons, quite frankly in the middle of a crisis it wouldn’t be of much use,” agreed an emerging markets economist.

A nice idea

There are several problems with the CMIM. First, it is a theoretical fund. Each country’s commitment is held within its respective central bank. This means that there is no real pool of money available, which limits the chances of a rapid turnaround—the main reason the fund was developed in the first place.

“There is no real fund in the form of a bucket of money anywhere; it’s just commitments of central banks in the member countries. So if there’s a crisis at three in the morning, who do you call? The procedures relating to accessing and activating the CMIM need to be clarified,” said Menon.

Secondly, while economists believe it is a good step to raise the percentage any participant can access without a parallel IMF programme from 20% to 30%, they think that this level is still much too small.

“That’s the main constraint on its use, the very large portion that requires an IMF programme to be attached to it before countries can avail of it. Unless there is a major increase in the IMF de-linked portion, use of the CMIM fund may be limited due to the ‘IMF stigma’ associated with it,” according to Menon.

“The bigger point is about the effect to which they can use it. How much can each country borrow without having to have an IMF programme, and how quickly can it be implemented?” asked J.P. Morgan’s sovereign analyst Matt Hildebrandt.

A brighter future?

Despite these limitations, economists agreed that the CMIM is moving in the right direction.

The participating countries are working on a prequalification post-conditionality facility. This means that if countries that have qualified find themselves in need of liquidity they can access funds immediately and deal with the conditions later. This was not the case with the IMF structure during the Asian financial crisis.

“That’s where the CMIM might appear attractive if they can get that precautionary line working relatively quickly,” said Menon.

With this in place, it is possible that the share of the US$240 billion that frontier markets will have access to could be sufficient to put off a funding crisis.

“In our view the US$240 billion should be sufficient for meeting emergency liquidity funding for deficit countries in Southeast Asia. Meanwhile, surplus Northeast Asian countries, and the NIEs [Hong Kong, Singapore, Korea and Taiwan] are unlikely to really need this facility,” said Aninda Mitra, head of Southeast Asia economics at ANZ.

The fund is aimed at the smaller frontier countries. The countries singled out by Moody’s to benefit most from it, Vietnam, Cambodia, Myanmar and Laos, will be able to access up to five times the amount they have contributed to it.

In comparison, China, Korea and Japan will only have access to 0.5% of their contribution. This leads some to speculate that the fund is more symbolic and political than practical.

“Maybe in the future when Laos or Cambodia or Myanmar integrate themselves into the financial markets this could prove to be a nice cushion but really it’s now only Vietnam that could benefit,” said Hildebrandt.

“However, in an acute currency crisis, Vietnam or any other country would still probably end up with an IMF program.”

“We’re still talking about a small percentage of a small fund, despite the doubling. If you look at the amount involved in the Asian financial crisis, the amount involved there for any one country, this fund is clearly very small still and if you have a crisis that’s contagious then this is surely not going to be enough,” said Menon.

“I think it’s a symbolic fund now with an intention for it to become operational later.”
  • 16 May 2012

Bookrunners of International Emerging Market DCM

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Citi 68,957.80 315 9.72%
2 HSBC 63,598.43 369 8.97%
3 JPMorgan 58,711.87 255 8.28%
4 Deutsche Bank 32,827.09 139 4.63%
5 Standard Chartered Bank 30,983.80 220 4.37%

Bookrunners of LatAm Emerging Market DCM

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Citi 20,172.62 62 14.30%
2 JPMorgan 16,300.95 61 11.56%
3 HSBC 15,707.62 42 11.13%
4 Bank of America Merrill Lynch 13,030.61 52 9.24%
5 Santander 11,734.03 47 8.32%

Bookrunners of CEEMEA International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 JPMorgan 26,997.79 92 13.19%
2 Citi 24,968.00 87 12.20%
3 HSBC 18,039.36 69 8.81%
4 Deutsche Bank 10,385.92 29 5.07%
5 Standard Chartered Bank 10,214.05 48 4.99%

EMEA M&A Revenue

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 02 May 2016
1 JPMorgan 195.08 50 10.55%
2 Goldman Sachs 162.26 37 8.77%
3 Morgan Stanley 141.22 46 7.64%
4 Bank of America Merrill Lynch 114.20 33 6.18%
5 Citi 95.36 35 5.16%

Bookrunners of Central and Eastern Europe: Loans

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 ING 3,133.69 26 8.62%
2 UniCredit 2,986.04 23 8.21%
3 Credit Suisse 2,801.35 8 7.70%
4 Sumitomo Mitsui Financial Group 2,594.98 10 7.14%
5 SG Corporate & Investment Banking 2,301.01 20 6.33%

Bookrunners of India DCM

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 AXIS Bank 12,906.34 183 21.93%
2 ICICI Bank 5,706.63 152 9.70%
3 Trust Investment Advisors 5,552.05 162 9.43%
4 Standard Chartered Bank 4,365.14 48 7.42%
5 HDFC Bank 2,786.90 77 4.73%