RP to get $1B via currency swap deals with China, South Korea

China and South Korea have agreed to grant $1 billion worth of concessional loans to the Philippines in the form of a currency swap, a scheme developed under the so-called Chang Mai Initiative.

Finance Secretary Jose Isidro Camacho said the deals with China and South Korea, which are both "practically done" will provide the Arroyo administration with standby liquidity.

According to Camacho, the talks were concluded during the Asia Pacific Economic Conference (APEC) in Los Cabos, Mexico where finance officials held several bilateral talks to shore up funds that would help bankroll its projected budget deficit in 2003.

The Philippine government was originally negotiating for a $3-billion bilateral swap with China but the final grant was for $1 billion and the terms would be similar to the currency swap agreement signed by the Philippines and Japan.

The swap agreements would be part of the Chang Mai Initiative where Asean countries together with Japan, China and Korea had agreed to forge as many bilateral agreements as possible and eventually lead to the creation of the proposed Asian Monetary Fund.

The Chang Mai Initiative calls for a comprehensive regional financing facility designed to prevent any future financial crisis from spiraling out of control the way it did in 1997 while Asian countries stood back with no game plan with which to handle the aftermath.

Under the Chang Mai Initiative, any country could access only up to 10 percent of the entire credit line in time of emergencies. For the facility to be 100 percent available, the country has to be under an approved loan from the International Monetary Fund.

This means that an IMF program is needed as trigger to qualify for funding, effectively putting the facility out of reach of countries like the Philippines that are stable enough to be able to move to the so-called post-program monitoring (PPM) facilities of the IMF.

Nonetheless, Camacho said the 10 percent that is accessible to the Philippines will be significant and possibly enough to tide the administration over.

In July this year, the Philippines signed a similar agreement with Japan for a $3-billion currency swap that give the Bangko Sentral ng Pilipinas (BSP) the flexibility to swap Philippine pesos for US dollars to meet liquidity requirements.

The BSA with Japan was effective for 90 days, renewable up to a maximum of seven times at an interest rate equivalent to the London interbank offered rate (Libor) plus 150 basis points for first drawing and first renewal. Subsequently, the premium is graduated to a maximum of 300 basis points.

The BSA between the BSP and Japan’s Ministry of Finance was first signed by the central bank under the Chang Mai Initiative.

The BSP said the agreement could be a forerunner of a payment system within the 10-member Association of Southeast Asian Nations (Asean) plus Japan, China and South Korea.

According to Camacho, the bilateral swap agreements between and among ASEAN countries together with Japan, China and South Korea, are preliminary to future attempts to forge a more permanent regional arrangement in the region.

The Philippines is at the forefront of the initiative to create an Asian Monetary Fund (AMF) as the regional counterpart of the IMF which had been criticized for its inability to react swiftly to the 1997 financial crisis.