CURRENCY SWAPS WITH REGIONAL NEIGHBOURS

The following Question stood in the name of Mr Simon S C Tay -

Mr Simon S C Tay: To ask the Minister for Finance if he will explain the nature and extent of Singapore's commitment to currency swaps with our regional neighbours, following the "Chiang Mai" initiative among ASEAN plus 3 countries, and the effect, if any, on our reserves.

Mr Thomas Thomas: Question No. 15, Sir.

The Minister for Finance (Dr Richard Hu Tsu Tau): Mr Speaker, Sir, Singapore has an existing commitment to the ASEAN Swap Arrangement, or ASA for short, which was established on 5th August 1977, together with the central banks of Indonesia, Malaysia, the Philippines, and Thailand. It is a co-operative financing facility aimed at alleviating temporary balance of payments needs among the five member countries.

The total facility under the ASA amounts to US$200 million, which is to be contributed in equal amounts by each participating member, that is US$40 million each. The participating member is permitted to draw on the facility for up to a maximum amount of twice their contributions, which is US$80 million.

Allow me now to explain a little about the mechanics of this swap arrangement. A member country with liquidity problems or needs can exchange or swap its local currency for US dollars provided by the other member countries of the swap arrangement. A currency swap is effected through a spot purchase of US dollars against the domestic currency of the borrower, accompanied by a forward sale of US dollars by that borrower against the same amount of domestic currency. The interest on the swap facility is the difference between the forward and spot exchange rates, determined by the interest rate of the Eurodollar deposits for the relevant period of the Arrangement as quoted by the Bank of International Settlements in Basle, two working days prior to the value date.

A swap transaction shall be for a period of one, two or three months, and may be renewed once for a maximum of another three months.

The swap facility is made available only to the central banks and monetary authorities of the participating ASEAN countries. A participant may choose not to participate in a swap transaction.

The "Chiang Mai" Initiative was an outcome of the ASEAN plus three Finance Ministers Meeting held in Thailand in May this year, and was in recognition of the need to establish a regional financing arrangement to supplement existing international facilities. The "Chiang Mai" initiative can essentially be broken down into two parts:

(a) An expansion of the ASEAN Swap Arrangement to include all ASEAN countries; and

(b) The establishment of a network of bilateral swap and repurchase agreement facilities among the ASEAN countries and the plus three countries of China, Japan and the Republic of Korea.

However, the details of the Initiative and its implementation are not yet finalised, and are still being worked out by the central bank officials.

Mr Tay also asked what impact this swap arrangement will have on Singapore's reserves. In short, there will be none. The currency swap arrangement is a form of collateralised short-term loan. It is no more than a conversion of one form of asset to another, that is, from US dollars to its equivalent in another currency, with the commitment that the transaction will be reversed at a future date at a predetermined exchange rate. Thus, there will be no impact on our reserve position.

Because of our close links with our neighbours in the East Asia region, Singapore is affected by the economic well-being of their economies. This was clearly demonstrated by the recent financial crisis. It is therefore in our interests to do what we can to maintain economic and financial stability in the region. The "Chiang Mai" initiative is just one step towards this larger goal.