The ten countries that make up the Association of Southeast Asia Nations (ASEAN) – collectively the seventh largest economy in the world – are capturing a great share of trade in Asia and taking their place on the global stage. With the ASEAN Economic Community (AEC) set for completion in December, Treasury Today Asia takes a closer look at the region’s potential.

Founded in 1967, the Association of Southeast Asia Nations (ASEAN) aims, as set out in the ASEAN declaration in 1967, are: to accelerate economic growth, social progress, and cultural development in the region; to promote regional peace and stability and to provide assistance to each other in the form of training and research facilities, amongst other social and sustainability goals.

These aims have always faced challenges – least of all because of the region’s enormous scope. ASEAN covers about 3% of the total land area of the Earth and the ten countries account for around 8.8% of the world’s population. Inevitably, this means the region exhibits considerable diversity which can throw up problems for corporates operating there. But whilst the varied business landscape means expected net returns are more dependent upon a company’s treasury performance, it is anticipated the countries will have a combined gross domestic product of $2.1trn once the ASEAN Economic Community (AEC) is instituted. ASEAN therefore represents an attractive prospect and, without a doubt, investors are increasingly appreciating that the challenges are outsized by the potential rewards. For instance, the European Union (EU), according to the European Commission’s annual trade and investment publication released in July, is the largest investor in Southeast Asia and, after China, the region’s biggest trading partner. Given recent volatility in the country, it is likely more and more corporates will be looking beyond China. “The new norm in China is a lower rate of growth. Thus, attention is turning to ASEAN,” explains Victor Penna, Managing Director Global Head of MNC Sales and Treasury Solutions for Standard Chartered.

Country specific trends

Multinationals are keen to tap these markets as a major part of their global expansion plans. “This is evident in ASEAN’s foreign direct investment inflows, totalling $122bn in 2013, which soared 25% on average over the past 14 years,” explains Melvyn Low, ASEAN and Singapore Country Head, Treasury and Trade Solutions for Citi. Investors within the region are also looking for opportunities. As of June this year, ASEAN investors spent $54.6bn towards projects in Vietnam. Top investors were: Singapore ($32.2bn), Malaysia ($12bn) and Thailand ($6.8bn). In fact, the Q3 2015 Business Optimism Index by Dun & Bradstreet indicated that business confidence in Vietnam improved by 16% in one quarter, and 46% of respondents anticipated better business conditions for the final quarter of the year. Optimism amongst other countries in the region (Indonesia, Malaysia, Philippines, Singapore and Thailand), however, has been dampened by currency volatility, the report notes.

Nevertheless, disparity is nothing new for corporates in the region. Taking the financial sector as an example, Penna explains: “As you move into the different countries, the development of financial services varies a lot.” Whilst the likes of Singapore and Thailand embrace transparency and boast mature banking sectors, Myanmar is in its infancy and the country is only just seeking its first credit rating (it is predicted 10% growth in 2015, however). It is in the transition to market economy and has to avoid the pitfalls – corruption, inflation and rising living costs – other more developed countries in ASEAN have, by and large, successfully side-stepped.

“Singapore, for instance, is the regional hub for ASEAN where the financial markets are very well-developed. Malaysia too is quite advanced and has become more open in the past three or four years. Then there are the more restricted and under-developed markets such as Vietnam, Laos or Cambodia. Thailand and Indonesia fall somewhere in between where there is a reasonable level of local services,” Penna says.

Creating regional unity

Despite the prevalence of regional inconsistency, change is afoot in the form of the AEC. Envisioned to transform ASEAN into a region with free movement of goods, services, investment, skilled labour and freer flow of capital, AEC progress “has been ongoing for many years,” says Leslie Choo, General Manager and Vice President, ASEAN and Greater China, for payments provider ACI. The charter, signed by all members of ASEAN in 2007, set out the goal of achieving regional economic integration by the 31^st December 2015, a date brought forward from the original 2020 aim. “The AEC could be set to change the game plan for ASEAN,” says Choo.

The removal of restrictions on trade, investments, capital flows and people would provide huge opportunity for the countries, the corporates operating there and the banks lending to them. The upsurge in intra-ASEAN trade has already been the biggest story over the past few years, and AEC looks set to accelerate this further. However, the region has a patchy history with such inter-country agreements, explains Neil Katkov, Senior Vice President Asia for Celent. “Although everyone hopes it will bring a lot of benefits to the region – and it certainly has that potential – it’s not a sure thing.” Historically, multilateral negotiations have been prone to deadline slippages and corporates cannot be certain of the end-of-year goal.

When it comes to expectations, some lessons have been learnt from the European continent’s troubles. For instance, prevailing opinion seems to be that conditions are not right for a single ASEAN currency union. Instead, in the absence of one currency, the aim is “to have one foundation for multiple currencies, which must be formed to override the inefficiencies created by diversity for corporates doing business,” explains Choo.

An increased level of trade liberalisation in ASEAN is much more likely than any movement towards a currency union. And the roots from which the AEC could flourish are certainly growing. Manufacturing, for example, is moving away from China due to increasing costs with many corporates choosing countries within ASEAN as new manufacturing locations. Moreover, Choo believes that once the AEC gains traction, “there will be huge interest for countries like Japan or China to tap into the region as well,” he says. Indeed, some co-operation already exists with ASEAN Plus Three (APT), a forum that coordinates ASEAN and China, Japan and South Korea which can be built on as ASEAN becomes more of a global player.

Payment and banking considerations

“Payments infrastructure is one of the key areas for the formation of AEC. It will be a necessary criteria for countries to allow businesses to attach to, and benefit from, the community,” explains Choo. Some countries have already been leveraging a faster payments infrastructure – Fast and Secure Transfers (FAST), formerly known as Giro 3 (G3), is a real-time payments initiative built on ISO 20022 in Singapore, for instance – yet “there’s not really a linkage between countries.” For a pan-ASEAN clearing and settlement system to work, other countries would need to modernise their domestic payment infrastructures and this will inevitably take some time. Change is on the horizon, however, as Singapore has indicated from day one that FAST would be able to process cross-border payments within ASEAN and connect these clearing houses together one day.

It is hoped that an integrated banking sector would encourage the emergence of globally competitive ASEAN-based banks as well as improve the overall stability of the region’s banking sector – an advantage which will be felt by the larger corporates and SMEs alike. Indeed, “businesses in the region are driving the ASEAN payment network,” explains Choo, and notable progress is occurring. For instance, the recent announcement regarding UnionPay International (UPI) and the Thailand Bankers Association signing a chip card standard license agreement in August. The agreement will push forward nationwide chip migration of debit cards and ATM machines in Thailand; upgrading from the use of magnetic strips in cards to chips compatible with international UPI standards will lay a solid foundation for innovative application and value-added services.

If more countries could move towards using a standard that everyone understands, that would be a huge step forward for the region. A wider adoption of ISO 20022, Choo cites as an example. In 2013, Thailand’s Electronic Transactions Development Agency (ETDA) and SWIFT signed a memorandum of understanding to promote the adoption and use of ISO 20022 amongst the financial industry in the country and region. In ASEAN, SWIFT has been working with financial institutions and governments to standardise financial connectivity and messaging. Singapore, the Philippines, Malaysia, Indonesia and Thailand already have their real-time gross settlement (RTGS) on SWIFT. Some of the smaller economies are inevitably taking longer to migrate to a common standard.

But regional developments are by no means limited to the payments space. International banks will also be trying to increase their competitive appeal when the ASEAN Banking Integration Framework (ABIF) is implemented (anticipated by 2020). This is because, under ABIF, regional ASEAN-based banks will be re-classified as local banks across the ten countries, rather than being treated as foreign banks when operating in a neighbouring country. It is a landmark agreement to allow member nations’ banks to operate in each other’s markets.

ASEAN is dominated by large global banks, but they depend on local banks in each country for the last mile of delivery. Under ABIF, they could face stiff competition from local and regional players. Especially given that, in the last four years or so, local banks have been trying to provide more transaction banking services themselves. “In most cases, they start out with online cash management but some larger regional banks are putting in place fully-fledged services,” adds Celent’s Katkov.

Malaysian-based Hong Leong Financial Group Bhd (HLFG), for instance, has been scouting for merger and acquisition opportunities amidst ABIF integration plans in order to expand its presence. The bank has made it known it is on the lookout in emerging high-growth markets, such as Indonesia and Thailand, as part of a strategy to be of greater relevance and significance, regionally. “Many of the players in the market have great hopes for these initiatives (AEC and ABIF) and are already moving to expand in advance of them and certainly putting in place plans to take advantage of the agreements,” says Katkov. “There is a lot banks can do right now to expand their business without waiting for any formal inter-country agreement.” Citi, for example, has already been working with leading companies in the fast-moving consumer goods, healthcare and insurance sectors. “In fact, the rise of multinationals’ investments into ASEAN has resulted in a greater need for transactional banking support for their in-country operations to seamlessly connect with their regional treasury centres and global headquarters,” says Low.

Stumbling blocks

Whilst business sentiment is generally positive in ASEAN, and there are currently many encouraging developments in the region, implementation has made it hard for corporates to plan for the future. “The number of concrete measures towards this economic community that have been implemented is very small,” says Penna. What’s more, integration for the region is not likely to stop with the AEC either as more trade, security and political unifications are anticipated.

Instead, corporates would do well, according to Penna, to focus on the reality that the region’s opportunities come part and parcel with challenges around regulatory change and operational complexity meaning treasurers need to be agile in their approach. As a result of local preferences and cultural sensitivities, they cannot rely on a one-size-fits-all strategy in the region. “Restricted markets are part of the norm in Asia and the challenge for corporates is understanding regulations and restrictions on a country-by-country basis,” Standard Charterd’s Penna explains. In terms of being able to do cross-border lending and what capital account and FX restrictions are in place, it’s quite a mixed bag. “On one end of the spectrum, you have open markets such as Singapore and, on the other, there are restricted countries like Vietnam. All the others sit somewhere between those bookends.”

When change does occur, corporates may have to prepare in an atmosphere of uncertainty. Malaysia, for instance, introduced a consumption tax (to replace its previous sales tax and service tax) in April this year, but the details took a long time to be finalised. Moreover, Indonesia is looking closely at transfer pricing. Although developments, such as these, need to be kept a close eye on, it’s not all bad news: Vietnam is set to reduce its corporate income tax rate to 20% from 22% in January 2016. Increasingly, countries in the region are avoiding using tax incentives for short-term investment, but are taking steps which help corporates navigate what is a complex landscape. For example, the Economic Development Board in Singapore, the Malaysia Investment Development Authority and the Board of Investment in Thailand encourage sensible – and hopefully repeat – investment in their countries.

Harmonisation: the end goal

Such institutions help investors, but there is a lot corporates can be doing to overcome regional nuances, explains Penna: “It goes back to good old-fashioned treasury risk management. For example, when buying a substantial asset in a market which is quite restricted, ask yourself if it’s possible to borrow in local currency in order to create a natural hedge between assets and liabilities on the balance sheet.”

And corporates are willing to take this on; as Low explains, the heightened momentum over the AEC has been a catalyst for foreign direct investments. Many multinational and large companies are making decisions now to invest and grow in the ASEAN markets in the next five years, and overall integration within ASEAN is beginning to help corporates obtain faster financing, improve trade document transfer and increase transparency, allowing for better governance and risk management. Whether the whole of ASEAN can exceed the sum of its parts remains to be seen. However the AEC pans out, “harmonisation is a great dialogue for the ASEAN countries to be having because it certainly supports any AEC-type initiative, perhaps even more than the international accords themselves,” concludes Katkov.