This issue’s question

“Since AEC integration at the end of 2015 what have been the most significant developments across the ASEAN region and what opportunities or challenges have these developments created for corporate treasury departments?”

The AEC effectively spells the free movement of goods, services, skilled labour and investment – and our clients have been responding with gusto. It has triggered regional homogeny in trade and investment. The implementation of the Prioritised Key Deliverables under the Phnom Penh Agenda has resulted in tariff elimination on exports of ASEAN-originating products and the elimination of trade barriers between member states.

Intra-ASEAN investment is outpacing investment from Europe and Japan at US$22bn as of 2015, amounting to almost 20% of all FDI. At the same time, ASEAN GDP is set to more than triple by 2030, ranking it the world’s 3rd largest economy.

We are seeing increasing interest from corporates investing in markets like Vietnam and Cambodia. Despite the uncertainty in the ratification of the Trans-Pacific Partnership, Vietnam and Cambodia will continue to be attractive to manufacturers, especially with China’s operational costs becoming increasingly expensive.

Undoubtedly, ASEAN presents glittering prizes for corporates; however, traversing the complex financial regulations and conditions does pose challenges.

Firstly, while national clearing infrastructure within ASEAN is fast developing – including Myanmar and Cambodia developing real-time gross settlement system, and Singapore and Malaysia having already established real-time low value settlement with FAST and FPX – cash and paper instruments are still commonly used in developing markets like Indonesia and Vietnam. Effectively, this means that many companies paying wages in developing markets are handing out cash.

There is a digital financial inclusion agenda under the ASEAN Connectivity Masterplan 2025, but it will take some time before we have a homogenous pan-ASEAN payment system like the Single Euro Payments Area (SEPA).

Secondly, foreign exchange regulations can pose roadblocks. Within ASEAN, treasurers need to contend with ten different currencies and its different exchange control regulations. A number of the currencies are non-tradable outside of their home market, and banks are required to ensure that corporates provide supporting documentation with purpose of payments for all foreign exchange transactions.

This restricts the free movement of cash and limits the use of liquidity management solutions to utilise excess trapped cash. For example, in Vietnam, the basic task of taking surplus liquidity out of the market could be hampered at a time when US dollar liquidity is limited, as businesses need to convert their Vietnamese dong to US dollar.

Thirdly, there is no single regional or international bank that fully covers all ten ASEAN countries. Treasurers will probably need to use a number of banks to support the corporate cash management needs in ASEAN. Local banks may not provide SWIFT capabilities for account statement reporting or payments. Hence, certain business data might be missed out, limiting the overall visibility of cash and increasing the difficulty in managing working capital efficiently.

With recent geo-political events (Brexit, USA election results), protectionism is clearly here to stay. However, selected regional organisations like ASEAN have been making steady progress since their foundation in 1967. 2015 was a key milestone for ASEAN with the formal establishment of the ASEAN Economic Community (AEC).

The region has now been transformed into a dynamic and creative platform for trade and commerce. ASEAN economy as well as population is now the 3rd largest in the world, with more than 50% of the population under 30 years old.

The single market is one of the core pillars of AEC, efforts of which are clearly visible in at least two areas. First is the aviation industry with implementation of the ASEAN open skies policy. The second area where significant advancements are visible is the financial services industry. AEC aims for gradual removal of restrictions for ASEAN financial institutions (banks and insurance companies) allowing them to provide services across member countries with a simplified operating framework.

Given market demographics, AEC framework creates significant potential for insurance companies. A well-developed, open and integrated insurance sector signifies competitive markets with greater quality and lower-cost services for the customers to choose from, particularly for catastrophe insurance which is relevant in many ASEAN markets.

With a significant rise in intra-regional, as well as external partner trade, AEC has also created significant opportunities for improved treasury and liquidity management. Cash centralisation in a treasury centre has always been a key objective for corporate treasurers. Of equal importance to insurance companies is the efficient management of its cash, including in the investment process. Whilst Singapore has been the pioneer for establishing treasury centres with open capital flows and FX policies, others such as Malaysia and Thailand are now pursuing similar policy reforms. Not every country in the region might be in a position to become a financial centre, but some are offering substantial incentives for setting up treasury centres in their home market. However, the ASEAN region is still hampered by a diverse set of regulations which inhibit the transfer of funds across markets. In fact, most markets still do not allow local currency to be held offshore which severely limits the ability for liquidity management structures.

Following the EU experience, without a stronger agenda on currency and regulatory co-operation and implementation of liberal policies, the ASEAN integration agenda will likely be overridden by complex processes and tedious execution.

Almost a year after its formal establishment, there have been considerable and steady advances in applying key measures of the AEC Blueprint for economic integration, especially in the elimination of inter-regional tariffs. Unfortunately, there have been fewer tangible achievements around more challenging hurdles, particularly towards financial markets integration. The AEC still needs to strive for a more consistent set of operating rules across the region’s markets in areas such as standards harmonisation, compliance, liberalisation of foreign investment, intellectual property and labour mobility.

To promote more active penetration of the ASEAN financial markets by regional banks, the ASEAN Banking Integration Framework (ABIF) was introduced to progressively remove restrictions to the provision of financial services by ASEAN financial service suppliers, and engender transparent supervision of Qualified ASEAN Banks (QABs) with single passports to operate in any ASEAN country.

However, the reality is that financial market and regulatory reforms have not lived up to the rhetoric.

This is not surprising given the differences in maturity of the financial systems of member nations. The nascent systems of Cambodia, Laos, Myanmar and Vietnam (CLMV) are ill-equipped to compete against the international standing of financial markets in neighbours like Singapore. These gaps also inevitably lead to some countries demanding more protectionism and time to develop and reform, resulting in different legal codes blocking major foreign participation and creating hurdles for financial integration. This is further exacerbated by ongoing global economic volatility and falling commodity prices that have made governments more defensive in protecting currencies and delaying foreign exchange liberalisation.

And while the freedom of capital to move across borders would bring about an increase in both out- and inbound FDIs and expand funding opportunities for corporates in emerging markets, ASEAN member states recognise that rapid capital account liberalisation could risk excess flows of capital. As such, restrictions around capital inflows and outflows between member countries remain to safeguard against potential macro instability and systemic risks.

Competition, rather than integration, also appears to resonate around certain aspects of corporate treasury. One such instance is the establishment of a shared regional treasury centre for MNCs that are expanding across borders and expecting to benefit from efficiencies with a singular ASEAN market. While Singapore is the premier regional treasury centre and should logically be promoted as ASEAN’s corporate treasury hub, a number of other countries such as Malaysia, Brunei and the Philippines are competing to host regional treasury operations. This then delays the development of a primary ASEAN shared treasury centre if corporates are being encouraged by regulators to locate regional treasuries in different countries on different legal frameworks.

On the flipside, integration of AEC in an environment with global financial uncertainty and an incremental rate environment could be a boon. We are witnessing some treasurers already shifting from the US dollar to local bond markets as an alternative to bank financing for corporate expansion, bolstering cross-border flows and contributing to the maturity of regional bond markets. Additionally, challenging market conditions are compelling treasurers to transform businesses to differentiate against competition. Talent management is a key focus and greater ASEAN mobility can help smaller organisations find specialised treasury, cash, liquidity and risk management skills.

With government bodies attempting to protect domestic interest, full integration may not materialise for years as they focus first on national rather than regional market developments. Nonetheless, for corporates and banks to truly benefit, momentum for financial integration has to accelerate.