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.