The ASEAN leaders’ summit in Kuala Lumpur in November 2015 was an historic moment. The heads of state from the 10 member nations signed a declaration establishing the ASEAN Economic Community (AEC), which formally came into being at the end of 2015. Advocates state that this grouping will lead to an exponential expansion of the region’s economies, which are already substantial. In total the AEC represented a combined GDP of some $2.6trn in 2014, along with 622m people, $2.5trn in world trade and $136bn in global foreign direct investment flows, according to figures from the ASEAN Secretariat’s Ministry of International Trade and Industry. The region is also seeing substantial and rapid growth, with the 2014 GDP figure being just around twice what it was in 2007 and the trade figure having increased by nearly $1trn over the same period.
The AEC seeks to take ASEAN even further down the path of integration via a three-pillar strategy. The pillars are: the ASEAN political and security community; the ASEAN socio-cultural community; and the AEC. Under this last pillar, a major effort is being made to boost integration amongst the association’s capital markets, with major implications for the Philippines.
A Unified Market
Capital markets integration within ASEAN is no new phenomenon. The liberalisation of regional markets in the 1980s led to a hike in cross-border transactions. Following the 1997-98 Asian financial crisis, financial sectors were modernised, with their international connections put on sounder footing. Regional arrangements for financial sector monitoring and liquidity support were put in place, with organisations such as the Asian Development Bank taking a close interest in regional bond market development, in particular.
Closer integration is widely seen as bringing several advantages. These include lower costs, a wider base of investors than the domestic market alone can provide, and more diverse portfolios for spreading risk and ensuring more stable consumption patterns, particularly during moments of market turmoil.
From an ASEAN perspective, the linking of markets also provides a much wider investor base for governments and corporations to raise funding, a particularly important factor for a region in which an estimated $600bn in investment for economic and social infrastructure is required for the 2013-23 period. Public financing is unlikely to cover all this, as no single economy within ASEAN has the ability to raise such funds. An integrated capital market, however, might have the capacity to do this.
The move toward the AEC, which began back in 2007 with the adoption of the AEC Blueprint by member states’ leaders, seeks to realise this opportunity. Yet, while by June 2015 some 90% of the key deliverables targeted for completion by the end of 2015 had been achieved, and virtually all goods within ASEAN were already traded at zero tariff, in the financial sector progress has not been as rapid. This has in part been due to the complexity of the sector, with the systems in place often tied to a web of domestic legislation. The financial sectors of each country are by no means on the same page either, with highly advanced, global capital markets such as Singapore at one end, and very under-developed markets, such as those in Cambodia or Myanmar, at the other.
A New Strategy
In 2008 an implementation plan for capital markets integration, drafted by the ASEAN Capital Markets Forum, was approved by the association. The three-phase plan called for the adoption of best international practices, progressive liberalisation and a sequencing of regional integration initiatives, along with better communication and consistency in regulation. A group of experts was established to guide the plan forwards, with the group including Jose Isidro Camacho, the Philippines’ former secretary of finance and the current managing director and vice-chairman of Credit Suisse Asia Pacific.
Then, in 2011, ASEAN central bank governors adopted the ASEAN Financial Integration Framework, which set a goal of achieving all of its aims by 2020. These are: the removal of all restrictions on the provision of financial services by ASEAN institutions within ASEAN; capacity and infrastructure building of ASEAN capital markets; liberalisation of the flow of capital across ASEAN; harmonisation of payment and settlements systems across the association; and further capacity building in strengthening regional surveillance and financing arrangements.
To date, several important moves have been made towards the realisation of this framework. In 2011 the ASEAN Exchanges network was formed, grouping together seven bourses: the Philippines Stock Exchange (PSE), Bursa Malaysia, the Hanoi Stock Exchange, the Ho Chi Minh Stock Exchange, the Indonesia Stock Exchange, the Stock Exchange of Thailand and the Singapore Exchange. The network seeks joint promotion of these bourses, which represent between them some 3000 companies and $2trn in market capitalisation. The network’s website displays moves across all seven bourses.
In 2012 the ASEAN Trading Link was established, offering a single gateway to investors linking the Malaysian, Singaporean and, later, Thai exchanges. Vietnam, Indonesia and the Philippines are expected to join in the near future. In March 2015 the respective capital markets authorities of Singapore, Malaysia and Thailand also signed a memorandum of understanding to develop a streamlined review framework for an ASEAN common prospectus. This will allow for equity and debt securities to be offered in all three countries, as it will substantially cut the time needed to gain approval – once this is granted, an offering can be made in all three countries. This forms part of the ASEAN Disclosure Standards, which were adopted by the three countries. For fund managers, the three have also launched the ASEAN Collective Investment Scheme Framework, a mutual recognition scheme that provides fund managers with a streamlined authorisation procedure for cross-border transfers.
While Malaysia, Singapore and Thailand have thus clearly taken the lead, the Philippines is also committed to following. There are, however, still several areas of contention. “Harmonisation and mutual recognition are the discussions now,” John Bennette Mamangun, assistant vice-president and head of the Corporate Planning and Communications Department at the PSE, told OBG.
In both areas, the role of the Philippines’ Securities and Exchange Commission (SEC) is key. Calls have been made for the commission to fast track the integration process. Francis Lim, president of the Shareholders Association of the Philippines, told ABS-CBN news station in July 2015 that the SEC should allow securities already registered on other exchanges to be registered in the Philippines. “I think it’s doable and we can do it as early as possible,” he said.
The ASEAN Trading Link, which is already something of a prototype for a fully integrated ASEAN capital market, has not involved the rewriting of regulatory codes in each country to meet a single standard, but rather the decision to recognise the legitimacy of each other’s legal frameworks. Yet while such a system of mutual recognition would fast track integration, the SEC and other bodies have concerns about the compatibility of certain policies, such as banking secrecy laws. The Philippines has a strict code of secrecy making it difficult for information on bank deposits to be accessed, which is proving to be an obstacle to integration with other ASEAN countries where no such rules exist. A bill aiming to change this was rejected by the House of Representatives in September 2015.
Several other obstacles also exist on the way to further integration. One is the fact that the SEC is not a member of the International Organisation of Securities Commissions (IOSCO), although it has committed to gaining the legal authority to join. The ASEAN Trading Link requires that each authority be part of a mutual recognition scheme to validate transactions, so lack of IOSCO membership is an issue. Once again, banking secrecy laws are one reason the SEC finds joining this body difficult, as the IOSCO requires thorough exchange of information between members.
Another obstacle is that at present the exchange’s relatively small number of product lines might mean few benefits, while the downside might be heavier capital outflows than inflows. Others suggest that the Philippines’ capital market itself needs to become more integrated, with the merger of the PSE and the Philippines Dealing System (PDS), which runs the PSE’s fixed-income exchange. Clearly then, the road to integration is still a long one.
Political moves within the Philippines will have to be made, and steps such as the integration of the PSE and PDS will also be necessary. However, the commitment is there, with the case for integration long ago won. The next steps may be slow, but are coming.
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