Supporting a robust, inclusive, sustainable recovery
Stronger regional cooperation will help Asean economies rebuild, writes Masatsugu Asakawa
Two issues will be critically important for Asean members to shape their recovery from the Covid19 pandemic: strengthening regional cooperation and improving domestic resource mobilisation.
First is the need to leverage stronger regional cooperation to enhance regional financial safety nets, deepen regional trade and supply chains, and build regional health security.
US interest rate hikes often drive capital outflows from emerging markets, which can trigger currency and financial volatility. At this stage of the pandemic, the additional policy supports and accelerated vaccine rollouts in advanced economies have improved their near-term recovery prospects. These economies could start policy normalisation earlier than expected. Long-term interest rates in some advanced economies have already risen on positive outlooks and inflation concerns, rattling global financial markets.
A return to more normal interest rates could trigger another “taper tantrum” among Asia’s emerging markets, including those in Asean. To address this, we should reinforce regional financial safety nets such as the Chiang Mai Initiative Multilateralisation to cushion any possible spillovers from global shocks.
The pandemic has also shown how fragile global trade and supply chains can be. While I believe globalisation will eventually return, it will take a different shape, requiring our renewed commitment to regional cooperation and integration by deepening regional trade and diversifying supply chains.
The reconfiguration of global supply chains offers Asean economies a great opportunity to establish themselves as reliable new suppliers and to attract investment. To enhance competitiveness, Asean economies should reduce behind-the-border bottlenecks such as non-tariff barriers and restrictive regulations, continue improving trade logistics and efficiency, and promote paperless trade.
We also need to reduce health vulnerabilities and lift regional health security.
The ADB (Asian Development Bank) supports the Asean Strategic Framework for Public Health Emergencies and the establishment of Regional Reserves for Medical Supplies— which will help the region better respond to future disease outbreaks and pandemics.
The ADB will use its $9 billion (283 billion baht) Asia Pacific Vaccine Access Facility, or APVAX, to support Asean’s Vaccine Security and Self-Reliance. The region already has strong vaccine manufacturing capacities in Indonesia, Thailand and Vietnam, which can facilitate swift and fair distribution of Covid-19 vaccines despite near-term global supply bottlenecks.
The second key issue is improving domestic resource mobilisation. This will be indispensable as a foundation for a lasting recovery. It can be achieved by strengthening tax systems and closing loopholes through international tax cooperation, deepening local currency bond markets, and catalysing green finance.
The pandemic pushed many economies into fiscal deficits and higher debt, making domestic resource mobilisation a top policy priority for sustained postpandemic recovery.
The average 14% tax-to-GDP ratio in Asean is low compared to the average for developing Asia and the OECD, leaving room for improvement in boosting revenue generation and strengthening tax collection in Asean. Appropriate tax policy measures will be needed to strengthen the tax base and improve tax compliance once the region is on track to full recovery.
International tax cooperation can also help fight tax avoidance and evasion. The rise of the borderless digital economy makes it easier for multinationals to shift profits to low-tax jurisdictions and exploit tax loopholes. With the increase in multinational investments in growing Asean markets, we need to ensure that all parties pay their fair share of taxes.
To date, six Asean countries — Brunei, Indonesia, Malaysia, Singapore, Thailand and Vietnam — are members of the Inclusive Framework on Base Erosion and Profit Shifting, under which more than 130 developed and developing economies are collaborating closely to tackle the issue of tax avoidance. Eight Asean countries — Brunei, Cambodia, Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam — are members of the Global Forum, which is committed to the automatic exchange of information critical to combating tax evasion.
The second key measure to enhance domestic resource mobilisation is to foster local currency bond markets. Local currency bond markets are an effective funding source for increased fiscal spending, while also providing central banks an additional avenue for injecting liquidity into markets and cash-strapped businesses to safeguard financial stability.
Asean’s local currency bond markets have expanded significantly over the past two decades. In particular, thematic bonds, such as green, social, and sustainability bonds can help finance green infrastructure and inclusive recovery. While they remain a small fraction of the total market size, thematic bonds outstanding increased six-fold since 2017. The ADB is committed to working with Asean to reinforce this trend.
Finally, a green and innovative financing mechanism can help Asean countries to effectively mobilise financial resources and increase investment in quality, climate-resilient infrastructure.
The Asean Catalytic Green Financing Facility, or ACGF, under the Asian Infrastructure Fund, is owned by Asean countries together with the ADB and receives administrative support from the ADB. Launched in 2019, the ACGF aims at scaling up green projects in the region by mobilising public and private resources. Through $1.4 billion in support from six partners including the ADB, the ACGF will make projects less risky by reducing the cost of equity and debt. By doing so, we make the projects more bankable and attractive for private investors.
The ACGF is not only a source of financing, but also of knowledge. Through the ACGF, the ADB is providing technical assistance to support Thailand, Indonesia and the Philippines in issuing green, social, and sustainability bonds.
Stronger regional cooperation and more effective domestic resource mobilisation will help Asean economies recover and rebuild for a greener and more resilient future.