Asean�s imprecise policies hinder trade growth

South-east Asia has a major opportunity to create an integrated economic community but the Association of South-East Asian Nations will never achieve such an objective if it doesn�t offer concrete goals.

  • 23 May 2011
Email a colleague
Request a PDF

It may have taken over 12 years, but Asia�s tiger economies finally seem to be roaring in tandem once more. Not since the mid-nineties have the countries of the South-east of the region been so prominent in the world�s financial circles.

Indonesia is nearing investment grade, the Philippines saw a 40% rally in its main stock market last year and Thailand experienced economic growth of 8% in 2010. Even Laos opened a stock exchange this year (January 11).

It�s all setting a comfortable backdrop for the disparate and wildly divergent economies of the Association of South-East Asian Nations (Asean) to finally form an economic community by 2015, an objective it originally set itself in 2003.

The benefits forming an economic bloc are numerous. It would help increase trade and investment, boosting economic growth and prosperity region-wide. That would help Asean improve its competitiveness, an important factor considering it is competing directly with the rising economic behemoths of China and India, as well as resource-rich Australia.

A united Asean economic bloc would constitute 600 million people and a combined gross domestic product (GDP) of US$1.8 trillion last year, making it the ninth-largest economy in the world.

Trade has already increased greatly since the Asean free trade area (Afta) was brought into being in 1992. Overall Asean trade was US$302 billion in 1990. It then more than doubled to US$650 million in 1995. By 2009, that had almost tripled to US$1.5 trillion, US$376 billion of which was intra-Asean trade.

Asean now aims for regional economic integration � known as the Asean Economic Community (AEC) � by 2015. It envisages the following key characteristics: a single market and production base; a highly competitive economic region; equitable economic development and full integration into the regional economy. In other words, its aims amount to some vaguely positive epithets with little by way of measurable goals.

But halfway towards its self-imposed deadline Asean�s objectives for this economic community remain broad and ill-defined. While the leaders of the nations in the bloc are roughly on the same page when it comes to its establishment, specific targets are impossible to come by.

�They haven't defined what integration means, there are no real qualitative and quantitative benchmarks there so it�s left open to interpretation,� says Ernest Bower, senior adviser and director of the South-East Asia program at Washington DC-based think tank, the Center for Strategic and International Studies.

There are also numerous structural hurdles. Creaking infrastructure needs to be developed to increase productivity; financial structures need to be built to facilitate trade flows; nascent financial markets need nurturing to provide liquidity for funding; rampant corruption needs to be reeled in; civil institutions need to be created; and a strategic balance needs to be reached over Asean�s interactions with giant neighbours India and China. It�s a daunting check-list.

To surmount these major obstacles to Asean must sharpen up its exact objectives, so its members have something to work towards. Otherwise its grand talk about the AEC will never become a reality.

Structural beginnings

Asean�s plans for a trade bloc date back to 1992, when the then six members of Asean � Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand � signed up to Afta. Its primary objectives are to reduce trade barriers like tariffs and attract more foreign direct investment to the region. Vietnam subsequently joined in 1995, Laos and Myanmar in 1997, and Cambodia in 1999.

It decided to expand this to an AEC in October 2003, with a goal of attaining it by 2015. And economic integration is only one of its three tasks. The other two are security and socio-cultural integration, which could prove equally difficult to achieve.

Yet despite the fact that February of this year was the midpoint between the 2003 agreement and the 2015, progress towards AEC remains distinctly finite.

Tariff reductions and the investment boosts associated with Afta continue to lie at the heart of Asean�s AEC plans, while hard-to-define objectives such as improving cross-regional financial responsibility and cohesiveness of rules remains mostly on the periphery. As it stands by 2015 Asean looks set to claim success on what it has done � dropping tariffs for example � while ignoring what it can�t.

�The reality is that in 2015, Asean will continue to claim credit for having substantially gotten there on trade, especially when they define it as tariffs,� says Bower. �But I do not believe they'll be there on investment.�

Building trade finance fundamentals

For Asean to genuinely boast that it has improved regional trade levels, it needs to promote adequate trade infrastructure to facilitate it. But while countries such as Singapore enjoy sophisticated trade infrastructure, the so-called CLMV countries of Cambodia, Laos, Myanmar and Vietnam lag far behind.

�In terms of financial infrastructure, you�re looking at access to capital, liquidity and supporting more importantly the small to medium scale sector with cheap or reasonable credit,� says Anand Pande, head of product management in global transaction services, Asia Pacific for the Royal Bank of Scotland (RBS).

Given how crucial a role small-to-medium enterprises (SMEs) play in Asean�s economy, supporting them with credit and financial infrastructure would go a long way to giving the region as a whole a boost.

Developing such infrastructure would help smaller corporate players in the region�s less-developed countries to more effectively export, import and deal with counterparties, says Neo Bock Chong, head of group transaction banking for OCBC Bank.

�The clearing systems in certain Asean countries are still not as developed,� says Neo. �In the area of domestic settlement for example, if improvement can be made to local low and high value payments to make it more timely and efficient, SMEs would be able to manage cash flow and working capital better.�

It would be equally important for Asean to help develop sophisticated open account trade financing, as opposed to the more traditional use of letters of credit (LCs).

With an LC a bank acts as an intermediary between a buyer and a seller on a trade, and effectively guaranteeing the transaction from the buyer�s side. It can be costly, but it helps mitigate counterparty risk for the seller.

Trading on an open account basis is considerably riskier, particularly in terms of counterparty risk, as the seller invoices the buyer for the amount purchased directly. This requires more counterparty due diligence and risk management processes, which can be more costly than LCs. But it is also much quicker and, if executed correctly, more likely to promote greater trade flows.

�Open accounts are much more efficient, which is why companies across the world prefer them, but they�re less common in certain parts of Asia where letters of credit are predominantly in use,� says Ashutosh Kumar, global head of local corporate products and receivables at Standard Chartered. �Most of Asia, including Asean, is more dependent on LCs as a means of commerce and means of trade; it would be quite nice if [the region] would move to open accounts.�

Inability to insure

Bankers note that it is important to promote credit insurance as a means of mitigating the risks involved in open account facilities with small counterparties in less developed countries. But again, the trouble is that Asean�s less developed countries lack such insurance capabilities.

�A company that needs insurance must purchase it from a local insurance provider,� says Kumar. �This creates a challenge for exporters who don�t have readily available credit insurance locally because they can�t export on open account terms.�

Connectivity to clearance and settlement systems is also a problem. Countries like Laos and Myanmar don�t even have real time gross settlement (RTGS) systems � which facilitate the real time transfer of funds and securities between banks.

And access to the Society for Worldwide Interbank Financial Telecommunication (Swift), which allows communication between banks that facilitates funds transfer, is very patchy. Member states need connectivity across their entire nation, as is the case in Malaysia, not just in large cities, as is the case in Myanmar, Laos and Cambodia, according to OCBC�s Neo.

In order to reach its potential in trade growth, Asean needs to facilitate the penetration of Swift, RTGS, LCs, open accounts and credit insurance � particularly for companies flung far and wide across a geographically disparate region.

Nascent capital markets

Even if such structural developments are successfully expanded throughout Asean, the region�s trade growth will still be capped unless more intra-regional and foreign investment can be encouraged � the second basic goal of Afta.

Thus, Asean also requires the development and integration of regional financial markets � and these are again, very different progress-wise among the member countries.

The difference in financial sophistication between Asean members is huge. Singapore has a stock exchange that attracts single listings north of US$5 billion whereas Laos just opened one in January.

Asean member countries need to develop and liberalise their capital markets in a responsible manner. The first step should be foreign exchange (FX) liberalisation. FX controls place constraints on companies that want to raise non-local currency debt, according to OCBC�s Neo, because it hampers their ability to make coupon payments and principal re-payments. It also limits their ability to hedge proceeds from trade denominated in foreign currency back into local currency.

Morever, the ability for foreign entities to invest in local currency products and vice-versa would boost liquidity and access to capital for the country�s corporates, as well as open up investment opportunities that would help develop countries� infrastructure. A smart approach to capital controls is crucial for that to happen.

But while policymakers and the public sector are moving at a glacial pace when it comes to creating a favourable investment climate, South-east Asia�s major companies are ploughing ahead. In many ways they are leading the charge for regional integration by building and acquiring operations in other countries with the region.

Some prominent examples include the work of Malaysia�s Tony Fernandes, CEO of airline Air Asia, and his work with the Philippine government on the Open Skies program which allows international operators to fly into Philippine regional hubs. Another trailblazer is Ramon Ang, president of San Miguel Corp., a Philippine conglomerate that has diversified into Indonesian coal, Thai food processing and Vietnamese beer brewing.

Malaysian banks have also been investing. Malaysia�s Maybank has acquired stakes in Singaporean and Indonesian financials, and chief rival CIMB also acquired G.K. Goh Securities in 2005.

The drag of graft

But the ability of corporates to sniff out profitable opportunities to invest is frequently stymied by endemic corruption and a weak rule of law.

Corruption takes on many forms: crony capitalism inhibits competition; fear of moral hazard creeps into transactions; the attractiveness of investment opportunities is undermined and political turmoil brings business to a halt. All these things inhibit trade.

The influence of graft in Asean could not be more disparate. While Singapore ranked equal first in Transparency International�s 2010 corruption perception index, Myanmar was equal 176th with Afghanistan. Only Somalia ranked lower. Laos and Cambodia were equal 154th, the Philippines 134th and even regional powerhouse Indonesia was equal 110th, along with a slew of sub-Saharan African countries and the Solomon Islands.

�There�s no doubt that Asean is wrestling with corruption,� says Bower of CSIS. �Inevitably money is going to find politics, but in South-east Asia there are no institutions to handle that.�

The key to reducing corruption is effective institution building, according to Bower. Regulation of how governments dole out business to the private sector, transparency in political donations, encouragement of better corporate governance by regulators and the establishment and empowerment of anti-corruption watchdogs are all steps that need to be taken.

Effective institutions exist in Singapore and good progress has also been made in Malaysia, with promise shown by the rhetoric of Najib Razak, the country�s prime minister. President Benigno Aquino III of the Philippines is also seen as a reformer who was elected on an anti-corruption mandate. The international community hopes he can reform the country�s corrupt judicial system and end the crony capitalism that has plagued it for decades.

If such reformers are successful they will add legitimacy and weight to the bloc and help attract and secure more foreign investment in both infrastructure and capital markets. They will empower industry to develop in a competitive manner, and secure economic growth.

Realistic outcomes

While the challenges are considerable, they are not insurmountable. But Asean needs to make decisions faster and allocate resources in a more decisive manner. As the 2015 deadline approaches, focus becomes paramount.

�2015 is a very ambitious target,� says Tai Hui, head of South-east Asia research at Standard Chartered. �If you look at the planning process, the construction process, these things take a significant amount of time.�

�We're now four years away and they really need to step on the accelerator to achieve what they set out to achieve,� he says adding that closer to 2020 is a more realistic timeline, particularly for the crucial hard infrastructure that needs to be built.

If Asean is serious about establishing an integrated economic community by 2015 or even 2020, let alone building unity along security-related and socio-economic issues, then it needs to develop a concrete strategy, set defined goals for its members, and commit to action.

The challenges facing it are not insurmountable. There is huge outside interest in the region and plenty of assistance available. However Asean has to take the right steps forward, rather than coast along on the back of demographically-driven trade increases and the reduction of regional tariffs that had been one of its goals for nearly 15 years anyway.

In particular the CLMV countries need to be brought up to speed on financial infrastructure � in terms of trade finance, transaction banking and capital markets. Corporates need the support of strong institutions and the rule of law to continue investment activity and open up the pie to others. And serious decisions need to be taken on how to deal with Myanmar (see box).

But at the core, Asean�s leaders need to make firm decisions about what they hope to achieve and commit to concrete steps on how to get there. Otherwise the region�s much-vaunted economic integration will remain nothing more than a fancy set of empty words.

  • 23 May 2011

Bookrunners of International Emerging Market DCM

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 24 Oct 2016
1 Citi 41,733.81 194 9.42%
2 HSBC 40,945.92 235 9.24%
3 JPMorgan 37,214.87 151 8.40%
4 Bank of America Merrill Lynch 29,284.07 123 6.61%
5 Deutsche Bank 20,416.10 78 4.61%

Bookrunners of LatAm Emerging Market DCM

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 18 Oct 2016
1 JPMorgan 13,268.07 33 6.30%
2 Bank of America Merrill Lynch 11,627.56 29 5.52%
3 Citi 11,610.06 30 5.52%
4 HSBC 10,091.34 29 4.79%
5 Santander 9,533.17 25 4.53%

Bookrunners of CEEMEA International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 18 Oct 2016
1 Citi 13,617.40 57 11.05%
2 JPMorgan 12,607.77 55 10.23%
3 HSBC 9,327.72 50 7.57%
4 Barclays 8,643.78 30 7.02%
5 Bank of America Merrill Lynch 6,561.15 18 5.32%

EMEA M&A Revenue

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 02 May 2016
1 JPMorgan 195.08 50 10.55%
2 Goldman Sachs 162.26 37 8.77%
3 Morgan Stanley 141.22 46 7.64%
4 Bank of America Merrill Lynch 114.20 33 6.18%
5 Citi 95.36 35 5.16%

Bookrunners of Central and Eastern Europe: Loans

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 18 Oct 2016
1 UniCredit 3,966.12 27 13.01%
2 SG Corporate & Investment Banking 2,805.90 16 9.20%
3 ING 2,549.27 20 8.36%
4 Citi 2,526.98 15 8.29%
5 HSBC 1,663.71 16 5.46%

Bookrunners of India DCM

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 19 Oct 2016
1 AXIS Bank 5,944.45 123 18.53%
2 HDFC Bank 3,792.05 100 11.82%
3 Trust Investment Advisors 3,390.86 145 10.57%
4 Standard Chartered Bank 2,299.63 31 7.17%
5 ICICI Bank 1,894.86 51 5.91%