Asean+3 financial stability at mercy of US policy swings, tested by greenback’s decline, banking’s digital shift

[SINGAPORE] The financial stability of the Asean+3 grouping remains vulnerable to US policy and geopolitical uncertainties, as the greenback’s waning safe-haven appeal and digitalisation in the banking sector open the door to potential fault lines.

Even though intra-regional trade and domestic demand have become increasingly important growth engines across these markets, their deep integration within the global financial system leaves them exposed to external shocks, said He Dong, chief economist of the Asean+3 Macroeconomic Research Office (Amro).

He was commenting on the findings of Amro’s annual flagship financial stability report on Thursday (Oct 9).

The Singapore-based macroeconomics surveillance organisation monitors the 10 Asean member states alongside China, Hong Kong, Japan and South Korea – a grouping that collectively contributes to more than 40 per cent of global growth.

Spillovers from Washington

Broadly, the external risks are concentrated around US policy uncertainty – particularly corporate credit risks tied to Washington’s trade playbook and potential market risks arising from cracks in the US dollar’s dominance, the report noted.

Amro pointed out that American tariffs could have material spillover effects on export-oriented companies, especially smaller ones with greater exposure to US demand either directly or indirectly through global supply chains.

Its economists urged more vigilant monitoring of unlisted micro, small and medium-sized enterprises (MSMEs) in raw materials and manufacturing, as they have relatively higher levels of debt-at-risk.

Their health is especially important as MSMEs employ nearly three-fifths of the working population in developing Asia, and any stress in the sector could have widespread economic implications, the report said.

Separately, Amro said the growth impact of US trade policies could prompt central banks within the region to lower policy rates to support domestic industries, reversing recent gains in bank profitability.

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Lower interest rates could compress net interest margins, particularly for banks in economies that remain heavily reliant on lending income. For example, Vietnam and Cambodia have reduced their risk-weighted asset intensities since 2020, but still maintain comparatively high exposure to riskier segments, the organisation noted.

Specific to fiscal risks, policy uncertainty in the US has quickly spread to other major advanced and emerging markets, which may be growing less tolerant of a lack of fiscal discipline.

Amro’s report cautioned that any emergence of fiscal concerns in the Asean+3 economies could force investors to call for higher term premiums and reduce demand for domestic bonds.

Greenback’s stumble

Growing scrutiny over the US dollar’s safe-haven status also creates other vulnerabilities.

For one, it could lead to a fragmented international financial system, said Amro, which means procuring liquidity from international markets and managing foreign exchange exposures would be costlier and less efficient.

Another risk is the formation of valuation pressures or bubbles in other assets perceived to be safer, since those denominated in US dollars account for about half of global equity markets and around 40 per cent of global bond markets, the report noted.

A third threat would be to US Treasuries, the yields of which have long served the international financial system as a risk-free anchor. The report said that these assets would no longer be risk-free, and markets would be dependent on private signals and relative valuations, inflating volatility and a structurally higher risk premium.

However, there are some benefits: A hit to the greenback’s appeal could translate into reduced reliance on dollar funding, spur capital inflows to Asean+3, and catalyse the use of local currencies for cross-border transactions.

Banking goes digital

Also in play is the deeper structural shift that comes with the rapid digitalisation of financial services, said Amro.

In the organisation’s survey of regional authorities, it identified the most pronounced risks as operational – such as cybersecurity and fraud – as well as systemic.

Notably, the results revealed that South-east Asian policymakers are more concerned about credit and business risks, while their East Asian counterparts have a greater focus on liquidity vulnerabilities.

While Asean+3 has yet to face systemic risks from cyber incidents, the interconnectedness of banking systems through technological or financial linkages opens up the possibility of such failures, noted Amro.

Policy recommendations

In the current climate, pre-emptive policy measures are even more important as safeguards against financial stability risks, the report said.

Broadly, Asean+3 authorities need to strengthen their domestic policy frameworks and bolster regional resilience. Amro pointed out that, unlike the US, regional economies face a less complicated challenge in the absence of significant upside risks to inflation. This creates room for monetary and fiscal policies to focus on supporting growth.

Additionally, a weak US dollar provides a window of opportunity, the report said.

Although a scenario of greenback resurgence should not be ignored, Amro said it is now an opportune time for Asean+3 authorities to encourage diversification in the use of currencies and improve funding resilience.

It also urged officials to monitor US dollar alternatives used by their financial systems, as well as build appropriate safety nets through swap lines and reserves denominated in these currencies.

Equally important is the need for clear, timely and transparent communication, Amro added.

For instance, where there are no clear policy targets or a nominal anchor – as is the case in China, Vietnam and Laos – credibility could be strengthened by clarifying final and intermediate targets, it said.

Such communication can also be in the form of explanations on the circumstances that foreign exchange intervention and capital flow measures will be implemented under. This may prevent market overreaction.

As for the digitalisation of banking services, Amro said policy measures to mitigate operational risks could include the introduction of loss-sharing programmes for cyber incidents and fraudulent transactions.

To address systemic risks, the report suggested that governments encourage key financial institutions to seek services from different vendors to reduce their dependence on just a few service providers.

Although pockets of vulnerabilities persist, the Asean+3 financial system remains resilient overall, said He.