44th Asian Development Bank Conference in Hanoi

Senior finance officials from Korea, China and Japan concurred on May 4th, 2011, to intensify cooperation to hamper financial crises in Asia. In addition, the three Northeast Asian countries assented to the Association of Southeast Asian Nations to examine the practice of local currencies for regional trade settlements.

             During discussions at the annual meeting of the Asian Development Bank in Hanoi, the three finance ministers mentioned they helped enhancing the regional financial security net under the Chiang Mai Initiative Multilateralism program. The CMIM presents a pool of funds which can be tapped through currency swap deals. It started in March 2010 as ASEAN and the Northeast Asia countries, the so-called Asean+3 group, agreed to set aside $120 billion to inhibit financial chaos in Asia.

   
   

The CMIM set up a structure to yield liquidity to nations that are feeling misery from a financial crisis and the three Northeast Asian countries agreed on the urgency for it to be utilized pre-emotively when there are symbols of a awaiting crisis. However, the ministers said the details need to be ironed out at the working level. The finance ministers agreed to pursue cooperation with the International Monetary Fund to explore ways to provide pre-emptive emergency liquidity to a country that appears to be slipping into a financial crisis. A finance ministry official said the fact that the ministers from all three countries have agreed in principle on preventive measures was significant. Demand has been growing for the role of CMIM to be expanded to crisis prevention as member nations currently can ask for its help only when financial turmoil unfolds.

             Finance Minister Yoon highlighted the prestige of confirming a dialogue channel with the IMF for developed cooperation, while attempting to double the amount of CMIM funds in the future. Regarding the possibility of employing local currencies for regional trade settlement, the Japanese finance minister mentioned this does not tell that Asia has lost self-possession in the U.S. dollar but, he indicated, using local currencies for trade settlements was more suitable. He also said that the matter is currently being delivered at the G20 and that the issue requires more research at the level. Indonesia’s finance minister, co-chaired the meeting, pointed out that the purpose of local currency practice is to inspire the increase of trade volume in the Asia-Pacific region.

The finance officials also assented to manage a study to demonstrate what they called the “regional settlement intermediary” as part of ongoing efforts to expand the Asian Bond Markets Initiative. The RSI is created to show settlement services for cross-border bond negotiation in the region. Analysts express that Asian bond markets are underdeveloped compared to those in the West. They also stated help for the start of the ASEAN+3 Macroeconomic and Research Office (AMRO), an agency to observe the financial situation in member countries and regulate the amount of bilateral currency swaps, if needed. China will lead the agency in the first year and Japan will then do it for two years.

The three ministers also talked about up-to-date inflationary force in Asia. The ministers said the current global inflationary pressure is distinct since it is induced by a deficiency of supply rather than ascending demand. They said they have asked for oil-producing nations to enlarge production. They also partially blamed market speculators, who utilize financial derivative products, for driving up oil prices.

JiMin Park / parkjm0718@naver.com

Meeting of Finance Ministers and Central Bank Governors in Paris

 

                                                                                                  

The G20 Finance Ministers and Central Bank Governors met in Paris on the 18th and 19th of February 2011. The main topic was to address ongoing economic and financial difficulties and to concur on a way forward to achieve the orders given. The ministers and governors have confirmed their commitment to manage policy action by all G20 members to accomplish powerful, sustainable and balanced development. Main priority actions involve carrying out fair term fiscal consolidation proposals modified according to national circumstances in line with Toronto commitment, searching for pertinent monetary policy, improving exchange rate flexibility to better reveal economic fundamentals and structural improvements, to assist global demand, enlarge potential growth, develop job creation and contribute to global rebalancing. Also, discussed progress made since the Seoul Summit and showed the need to diminish excessive imbalances and carry on present account stability at sustainable levels by intensifying multilateral cooperation.

               The leaders agreed on a set of measures that will allow us to focus, through an integrated two-step process, on those persistently huge imbalances which need policy actions. In order to complete the mandatory work for the basic step, their aim is to agree, by following meeting in April, on indicative guidelines against which each of these indicators will be evaluated, acknowledging the demand to take into account national or regional circumstances, including large supply producers. While not aims, these indicative guidelines will be employed to assess the following indicators: (i) public debt and fiscal deficits; and private savings rate and private debt (ii) and the external imbalance organized of the trade balance and net investment income flows and transfers, taking due deliberation of exchange rate, fiscal, monetary and other policies. Adopting a schedule for developing the 2011 action plan that will implement for Framework for Strong, Sustainable and Balanced Growth and look over the commitments that are already made, is another consent they reached. As approved in Seoul, IMF has been called on to distribute an assessment as part of the Mutual Assessment Process on development towards external sustainability and consistency of policies at the October meeting. At the moment, the leaders would make sure to review a report on the MAP including an action plan knowledgeable according to the examination on the root causes of continuously large imbalances based on the agreed guidelines.

                                 The leaders and governors at the meeting are looking forward to the completion by the next Leaders’ Summit of the following ongoing work on systemically important financial institutions as arranged in the FSB work program for 2011. For example, resolution of Global-systemically important financial institutions by FSB and national authorities based upon indicative standard; useful resolution scope including in a cross-border context; capital surcharges, contingent capital and bail-in instruments; and other supplementary requirements as determined by the national authorities including systemic levies. Once the frame initially applicable to G-SIFIs is agreed, the G20 Finance Ministers and Central Bank Governors will move promptly to cover all SIFIs. The 2 reports should be finalized by the BIS, IMF and FSB on macro-prudential frameworks and by the FSB, IMF and World Bank with input of national powers on financial stability matters in emerging market and developing economies by our October meeting. Not only that but also, the recommendations that the FSB will prepare by mid-2011 on regulation and oversight of the shadow banking system to efficiently address the risks, notably of arbitrage, associated with shadow banking and its interactions with the regulated banking system should be good to go. They also decided to call on the OECD, the FSB and other relevant international organizations to develop common principles on consumer protection in the field of financial services by our October meeting as well.

               The Group of 20 finance ministers and central bank governors meeting surely ended with a compromise on which major economic indicators to include in the “indicative guidelines.” A communiqué was released by setting their goal for the next meeting in April to agree on the guidelines being used to evaluate any indicators; public debt, fiscal deficits, and the private savings rate.

JiMin Park (parkjm0718@naver.com)

Looking back to the G20 Seoul Summit and forward to the 2011 G20 Summit

         The 2010 G-20 Seoul Summit was the fifth meeting of the G-20 heads of government, to discuss the global financial system and the world economy, which took place in Seoul, South Korea, on November 11-12, 2010. Specifically, the major topics were ensuring global economic recovery, framework for strong, sustainable, and balanced global growth, strengthening the international financial regulatory system, modernizing the international financial institutions, global financial safety nets, development issues and the risk of a currency war.

 

 

 

 

Main accomplishments of G20 Seoul Summit

  1. The G20 Seoul Summit has confirmed the 6-percent shift of quota shares to emerging economies in the International Monetary Fund, according to the joint communiqué issued after the end of the summit. The communiqué also said greater representation for emerging economies at the IMF Executive Board through two fewer advanced European chairs, and the possibility of a second alternate for all multi-country constituencies.
  2. The G20 leaders agreed on a standstill on trade and investment restrictions to avoid protectionism, and the Korea Initiative, which addresses a global financial safety net and development issues. They also reaffirmed political will for an early settlement of the DDA (Doha Development Agenda), preventing all forms of protectionism and expand trade liberalization in order to promptly bring the DDA to a successful and balanced conclusion.
  3. The leaders endorsed the Financial Stability Board’s (FSB) policy framework for reducing the moral hazard of systemically important financial institutions (SIFIs), including the work processes and timelines set out in the report submitted to the Summit. Specifically, G20 leaders agreed to endorse the FSB’s policy recommendations, prepared in consultation with the IMF, on increasing supervisory intensity and effectiveness. They also endorsed its recommendations for implementing OTC derivatives markets reforms, and principles for reducing reliance on external credit ratings.
  4. The G20 leaders welcomed the creation of a Flexible Credit Line (FCL) and Precautionary Credit Line (PCL) as new preventative tools to cope with future crisis. Countries with strong fundamentals and policies will have access to a refined FCL with enhanced predictability and effectiveness. Moreover, the PCL will allow countries with sound fundamentals and policies, but moderate vulnerabilities, to benefit from the IMF’s precautionary liquidity provision.
  5. G20 Summit used to be an inter-country dialogue; however, G20 Seoul Summit became a premier forum for global economical coordination by adding the private forum for global economical coordination by adding the private channel to it. The business summit in fact introduced a new model where the government and private sector cooperate on a global level.
  6. The leaders reiterate their commitments to completing an ambitious replenishment for the concessional lending facilities of the MDBs, especially the International Development Association, to help ensure that LICs have access to sufficient concessional resources.

 

Significance of G20 Seoul Summit

                          Due to the differences in the speed and extent of economic recovery among the G20 member countries, the sense of urgency once they shared has evaporated and spirit of cooperation have been significantly weakened when compared with the time during the 1st Washington Summit, which was held in 2008. G20 Seoul Summit sure became a turning point for building a new management system for the world economy in the coming future. Especially, the conflict between the U.S. and China over the value of the yuan has been escalating notably and a number of key countries have diverged in their positions on the G20’s core issues, which have given enough burdens for Korea in its efforts to generate fruitful outcomes from the Summit. The G20 Seoul Summit, so far, became a turning point for building a new management system for the world in the coming future. Korea’s effort to the development in the G20 deliberations has been recognized by the world, taking a step forward with leadership. G20 Seoul Summit will become one of most important parts of future summit meetings.

                     2011 is the year of France’s presidency of G20. The goal for this year set by the group’s leaders at last year’s summit in Seoul is to reach agreement in the first half of 2011 on a list of “indicative guidelines” for quantifying imbalances to prevent a repeat of the global economic crisis. In addition, France has more priorities for the year: firstly, to agree on tougher regulation to curb volatility in food and fuel prices and here come the antagonisms between the nations who produce and export commodities and those who seem to the biggest consumers of commodities. Secondly, to negotiate the inclusion of China’s yuan in the basket of currencies underpinning the IMF’s Special Drawing Rights. Not only that, development, innovative financing, and employment and social issues are major topics need to be discussed. France has expressed strong willingness to follow in the footsteps of Korea in hosting the G20 Business Summit.

JiMin Park (parkjm0718@naver.com)

Government Debt and Maintaining Fiscal Soundness in Korea

“Been there, done that”, many Korean people would’ve said when they saw Greece seeking for a bailout (support) from IMF (International monetary fund) and EU (European Union) as their government balances heavily deteriorated. Korea not only had experiences in IMF bailout program more than a decade ago, but successfully overcame a difficult period. Even though the world economy is still recovering from a financial turmoil in 2008, these financial meltdowns from Greece and other southern Europe countries could lead to another hard blow for lagging world economy. However, not all countries are running severe deficit on their government balances. Korea is considered to sustain its’ fiscal soundness of government balance. In regards to national government balance and related matters, fiscal affairs department of IMF issued their world economic and financial survey in order to monitor fiscal status of each region and countries. According to the recent issue of fiscal monitor by IMF, the average gross general government debt-to-GDP ratio for advanced economies is forecasted to rise from almost 91 percent at the end of 2009 to 110 percent in 2015. United States and United Kingdom, two countries strongly affected by recent financial crisis shall experience the largest increase of its debt where their growth prospects are weakened than others. On the other hand, for emerging economies, debt-to-GDP ratios are expected to either stay as current level or decline in 2011. Their sustainable growth and lower interest rate contributed to controlling fiscal balance as they pledged.

Hong Kong is projected to reach the lowest ratio by 2015 (0.5%), Australia (20.9%), Korea (26.2%), New Zealand (36.1%), and Switzerland (36.2%) are expected to follow. In comparison, Japan is expected to reach the worst level of debt ratio over GDP in 2015 projecting 250%. Already troubled Greece’s ratio is expected to be increased by 140.4%; Italy (124.7%), United States (109.7%), Portugal (98.4%), France (94.8%), and Spain (94.4%) are among countries projected to have high debt over GDP ratio over years to come.

Compared to other countries, Korean government successfully managed to maintain relatively solid fiscal balance and sustained its level for years. IMF reported that debt-to-GDP ratio is even going to be lower to mid-20% by 2015, which is 2nd lowest ratio among advanced economies.

Regardless of a sunny forecast and positive reports on Korean economy, it is believed that a couple of issues can not be overlooked in order to sustain the stable level of fiscal balance. One of the factors could be spendings on the healthcare system. Since Korea has extremely fast aging demographics, inevitably spendings on healthcare system would increase significantly. Potential tax revenue is expected to decrease due to the low birth rate; this could lead healthcare spendings to become a pretty heavy burden.  Also escalating amount of debt derive from local government shall be monitored.  The recent government study showed that the debt amount of local government estimates approximately KRW 25 trillion (7.96% of total government debt).  Though debt ratio over total government debt is being consistent, debt amount of local governments have grown significantly by 34.15% in 2009 compared to average 4% in previous years. Once local governments are in trouble, it is evident that the central government is to be affected eventually.  Maintaining well-balanced financial status with local government is necessary to consider as well.

Jinmok Kim

Weekly e-Briefing 7. Korea’s AML/CFT Policy Direction

Korea’s AML/CFT Policy Direction

 Today no country is free from the threats of money laundering and terrorist financing. Countries with weak or inefficient countermeasures attract illicit funds into their financial systems and provide platform for such criminals and terrorists. In order to protect integrity of the Korean financial system, after liberalization of foreign exchange transactions, Korean government has established the Korea Financial Intelligence Unit (KoFIU) in 2001 within the Financial Services Commission to stand against terrorism and to take effective measures against all of money laundering. Recently KoFIU has been admitted to the Financial Action Task Force, the leading international organization for anti-money-laundering and counter-financing of terrorism.

Last week, at the  FATF Plenary held in Abu Dhabi,  there was reporting on how Korea has been implementing its Action Plan since it became a member of the FATF in October last year.  And, for low-risk financial transactions, it is expected  to see deregulation in anti-money laundering rules as to allow more accessibility to financial services for those at the poverty level. Also, the FSAP, which stands for the Financial Sector Assessment Program run by IMF and IBRD, is planning to include the FATF anti-money laundering standards as part of its essential components. 

Internationally, Korea is playing an increasing role in global efforts to prevent money laundering and terrorist financing, and ultimately, to promote the concept of integrity within the financial market. As the chair of the G-20 Summit this Fall in Seoul, Korea is committed to playing a constructive role in ensuring a high-level of compliance among all nations with the global requirement for elevated financial transparency.     Please visit http://www.fsc.go.kr/eng/index.jsp for more details.