Instant cross-border payments can tie ASEAN together more tightly
Indonesia makes case for reducing reliance on external currencies within bloc
Dedi Dinarto is an associate with public policy advisory firm Global Counsel in Singapore.
Southeast Asian nations are building links between their national payment networks and working to set up a framework for direct cross-border transactions in their own currencies to accelerate regional economic integration.
At last month's Association of Southeast Asian Nations leaders' summit in Labuan Bajo, Indonesia, bloc members declared they would improve regional payment connectivity and promote local currency transactions. They pledged to work on a road map to expand regional payment links to all 10 bloc members.
The group's finance ministers and central bank governors are now tasked with overseeing implementation. When they met in Bali in March, ASEAN chair Indonesia stressed the importance of deepening regional integration due to the uncertain global economic outlook. The meeting concluded with a call to reduce reliance on external currencies like the dollar, euro and yen for cross-border transactions.
The drive for regional payment connectivity is likely to boost cross-border retail transactions by clearing the way for shopping via QR codes and real-time fund transfers (RFT).
Southeast Asia is already home to several retail payment mechanisms, but they are primarily bilateral. Last month, Indonesia and Malaysia opened a cross-border QR payment link, adding to an existing one between Indonesia and Thailand. Thailand also has set up QR links with Cambodia, Indonesia, Malaysia and Vietnam.
These links enable travelers from participating countries to complete retail transactions quickly by simply scanning QR codes at local shops with their mobile phones.
The only current RFT payment link in the region was set up between Singapore and Thailand two years ago. It connects Singapore's PayNow with Thailand's PromptPay to allow daily fund transfers of up to 1,000 Singapore dollars ($740) or 25,000 baht ($717) using only mobile phone numbers.
While QR code links are likely to help spur growth in tourism and increase consumer spending in general, RFT would allow both individuals and micro, small and midsized enterprises to conduct small-scale, cross-border transactions more conveniently.
An ASEAN-wide local currency transaction framework would enable business-to-business trade settlement without the need for use of external currencies like the U.S. dollar. At this point, local currency settlement is still primarily bilateral, as the regional framework established in 2016 still only covers Indonesia, Malaysia and Thailand.
A broader local currency transaction framework could help ASEAN nations mitigate foreign currency risks. The strength of the dollar in recent years has been reflected in weak local currencies; this has been a sore point as nine ASEAN members are net energy importers and eight are net food importers.
However, challenges remain for ASEAN to expand regional payment connectivity and lower usage of the dollar in cross-border transactions.
While ASEAN members have agreed to set up a local currency transaction task force to discuss and formulate plans for the blocwide transaction framework, no one has been designated to head up the body. However, more deliberation is expected when ASEAN finance ministers and central bank governors meet again in August.
Consider also Project Nexus, which was launched by the Bank for International Settlements in March to connect the EU's Eurosystem with the payment systems of Singapore and Malaysia.
Its scope is supposed to be extended to include Indonesia, the Philippines and Thailand. But unlike domestic instant payment systems, which answer to national central banks, Project Nexus will require a dedicated regional governing and operating body to ensure that cross-border payments are made safely and reliably.
Given that ASEAN operates on a nonbinding basis, a collective decision from all member states will be required to designate responsibility for setting up and running the Nexus board.
This will require political will from regional finance leaders and central bankers, but eventually a clearly defined road map should help guide ASEAN member states in gradually strengthening regional economic and financial integration.
This is unlikely to come at much expense to use of the dollar in the near term. The dollar's lead role in trade invoicing, overall cross-border payments, foreign currency transactions, cross-border borrowing and lending, and central bank reserves appears under little threat in Southeast Asia.
Indeed, even if ASEAN's local currency transaction framework moves forward, this should be seen as an imperative for economic integration rather than a signal that the bloc is trying to pull away from the U.S.
As this year's ASEAN chair, Indonesia has played a key role in facilitating dialogue and convincing member states of the importance of self-resilience in navigating the potential impact of global financial risks.
This is an issue that can bring ASEAN leaders together rather than divide them. Working toward expanding regional payment connectivity and building a local currency transaction framework is critical for getting Southeast Asian states on the same page now and in the future.