Missing out: the Philippine Stock Exchange has lost major domestic listings to the Singapore Exchange

A move to fully integrate ASEAN capital markets by 2015 is proving a powerful driving force for pan-ASEAN economic integration. Writer Michelle Price

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Since the Asian financial crisis of 1997, policy-makers among the 10 nations comprising the Association of South-east Asian Nations (ASEAN) have paid lip-service to the concept of greater pan-ASEAN economic integration. In January 2009, however, a landmark agreement among ASEAN's securities regulators, to fully integrate ASEAN capital markets by 2015, signalled renewed ambitions to realise the long-standing vision. February 2009's unveiling of the Capital Market Implementation Plan blueprint in Bangkok was swiftly followed by the news that the five most progressive ASEAN nations, Thailand, Singapore, Malaysia, Indonesia and the Philippines, planned to integrate their equity markets in a move that seemed to underline ASEAN's new-found resolve to combine forces.

As chair of ASEAN in 2009, Thailand has proved especially energetic in arguing the case for greater integration. According to Thirachai Phuvanatnaranubala, secretary-general of the Thai Securities and Exchange Commission (SEC) and chair of the ASEAN Capital Markets Forum, which drafted the integration plan, financial globalisation threatens to marginalise south-east Asia's minnow markets.

Singapore, ASEAN's deepest and most dynamic market by a wide margin, for example, represents about one-quarter of the Hong Kong market when measured on a relative basis.

Limited by a narrow range of products and services, relative illiquidity and high transaction costs, ASEAN's capital markets must integrate and build economies of scale if they are to compete convincingly on a global basis, says Mr Thirachai. "The ASEAN region is going to trade more and more within itself: we have to gear up the capital markets so the private sector can raise capital more freely cross-border and finance operations when they sell goods in countries regionally."

The blueprint demands the liberalisation of exchange controls, the regional harmonisation of regulatory rules and procedures, and the integration of the region's equity and debt markets: by 2015, ASEAN issuers and investors will be able to raise money and invest anywhere in the region from a single point of entry, at a competitive cost, or so the theory goes. Ultimately, ASEAN policy-makers hope to promote ASEAN as an asset class in itself in order to attract non-ASEAN investment.

The vision, not without its sceptics, is far-reaching and ambitious: while the development of the electronic trading link is certainly an encouraging sign of progress, several major challenges lie ahead.

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Asian development bank: integrating ASEAN capital markets

The ASEAN front

The integration of the ASEAN equities markets has been at the forefront of the integration plan. In what was widely regarded as a major development, February 2009 saw the creation of the ASEAN Common Exchange Gateway Alliance, with Thailand, Singapore, the Philippines, Indonesia and Malaysia signing a memorandum of understanding to launch a pan-ASEAN trading platform. The network, dubbed the ASEAN Bulletin Board, will electronically connect the participating ASEAN exchanges to facilitate cross-border listing and trading of those stocks from a single point of entry, allowing investors in the participating economies to access several ASEAN equities markets from their domicile country at a dramatically reduced cost.

Policy-makers hope eventually to include stocks from most of the 10 countries in ASEAN, leading to a single south-east Asian market for stocks. Speaking to The Banker in September 2009, Francis Lim, the outgoing CEO of the Philippine Stock Exchange (PSE) and a vocal advocate of the scheme, suggested that the common board might in time be extended to ASEAN+3 (China, Japan and South Korea) with whom ASEAN is also keen to cement relations. Beyond cross-border listing and trading, the alliance hopes, somewhat ambitiously, to extend the model downstream to the clearing and settlement level, although currency settlement for cross-border trades will initially follow domestic settlement rules.

The equity markets are the smart place to start, say onlookers. As the world's largest exchanges consolidate and globalise, and alternative trading systems continue their ascendance, very small equity markets will be overlooked. Exchanges such as the PSE and the Stock Exchange of Thailand (SET), for example, have lost major domestic listings to the Singapore Exchange (SGX) in recent years. Exchange chiefs such as Mr Lim, who left the PSE in February 2010, are conscious that ASEAN's smaller markets will either be absorbed into global exchange operators or marginalised if they fail to join forces and achieve economies of scale. In a politically astute comment betraying the strong protectionism that continues to characterise many Asian markets, however, Mr Lim went on to point out that the "real benefits" of the Bulletin Board will accrue to local brokers who cannot presently afford to trade cross-border.

This may be a pleasing side effect. But for Veerathai Santiprabhob, executive vice-president and chief strategy officer of the SET, which has been leading the exchange integration project, the key benefit of lowering the barriers to pan-ASEAN trading is the resulting ability to advance the perception of ASEAN as a distinct asset class. "Promoting ASEAN as an asset class to outside investors is more important in my view. The exchanges alone are very small in global scale but if we can promote ASEAN as an asset class, that will draw attention from outside investors," says Mr Veerathai. Products under consideration include an ASEAN exchange-traded fund (ETF), says Mr Lim. Although there is already an ASEAN ETF based on the FTSE/ASEAN 40 Index, it is only listed in Singapore, while a pan-ASEAN ETF would be listed on all member markets.

In a further encouraging sign of progress, the alliance announced in February this year that it has selected global exchange operator NYSE Euronext as its technology provider - a savvy move that may present future opportunities to connect to external order routing networks elsewhere and attract non-ASEAN order flow. The alliance hopes to have the platform up and running by 2011.

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Thirachai Phuvanatnaranubala, secretary-general of the Thai Securities and Exchange Commission (SEC) and chair of the ASEAN Capital Markets Forum

Tough timeline

Policy-makers and onlookers, however, have major concerns regarding the feasibility of the timeline, not only regarding the Bulletin Board, but the entire implementation plan. Masahiro Kawai, dean of the Tokyo-based Asian Development Bank Institute, which has produced policy papers on pan-ASEAN integration, says that, while the theory has largely prevailed among key policy-makers, the practical process of integration is slow. "Policy-makers and market players know that they can gain a lot by working together and integrating, but the actual progress of integration is somewhat slower than I'd like to see." Mr Thirachai recognises that the timelines are under threat and says that political leaders will have to "show strong commitment" if the project is to stay on target.

It is clear however that the workload will not be evenly distributed and that the less well-developed countries will have to work harder to bring their domestic markets up to scratch. This makes the entire proposition less attractive to those countries lagging behind, such as Vietnam, Laos and Cambodia, which may be overlooked in favour of larger, deeper markets such as Singapore and Malaysia. Local securities firms will also be nervous: while initiatives such as the Bulletin Board may serve the interests of local brokers, onlookers are divided on the benefits that ASEAN integration as a whole will deliver to local firms in smaller markets. In Thailand, which has a medium-sized capital market among its ASEAN peers, some bankers warn that liberalisation will allow international brokerages to crowd out the local firms, and many local brokers have complained bitterly on this issue. Indeed, the prospect that foreign competitors may win out under the plan to the cost of local players will be a hard sell for domestic regulators.

For Mr Kawai, however, these complaints miss the point: "It's true that relatively weak economies may lose in the short run because the neighbouring markets are more attractive. But these are very dynamic and fast-growing economies. In the short run, they may lag behind but I don't think that would last for long [and] from a medium- and long-term perspective I think everybody would win."

Appealing though this may sound, in some markets key stakeholders have yet to be convinced. The shock resignation of the PSE's Mr Lim two months before his tenure was due to expire makes this all too clear. He has been a strong champion, not only of the Bulletin Board, but of landmark domestic capital market reforms that will modernise the PSE and underpin the Philippines' inclusion in the pan-ASEAN vision. But his campaign to reform the PSE has proved the source of much acrimony with the PSE's board, which comprises influential stock brokers and company chiefs who have resisted efforts to raise the corporate governance standards required of listed companies. The loss of Mr Lim and other senior executives caught up in the crossfire will no doubt stymie progress on the Filipino front if not the Bulletin Board as well.

Even if the political will exists and the intellectual debate can be won, developmental disparities will also delay the process. The difficulties already encountered by the Bulletin Board demonstrate this all too clearly. Vietnam's Ho Chi Minh Stock Exchange (HOSE), for example, only signed up to the alliance in September 2009; Tra Le, executive member of the board of directors at HOSE, says that the exchange's ability to link up with the Bulletin Board was limited by its existing technical capacity. HOSE has been managing its own internal technology overhaul, the completion of which will allow the exchange to join the alliance. "We honour the commitment of our government to integrate into the region at a deeper level. But we had to look at the initiative from a different angle," says Mr Le. Participating in the project before the completion of its IT overhaul would mean paying "money for nothing", he adds.

Unforeseen consequences

Political and technical challenges aside, broader macroeconomic concerns have been voiced by some leading practitioners. Prasarn Trairatvorakul, CEO of Thailand's Kasikornbank and former secretary-general of the Thai SEC, warns that greater integration will have broader and possibly unforeseen implications for inter-regional monetary policy, capital flows and regulatory supervision. Policy-makers will have to make a "trade-off" regarding the extent to which they are prepared to prioritise the pan-ASEAN vision above national interests, he adds.

Market integration will certainly force member nations to liberalise capital flows, which will include relaxing foreign exchange restrictions and foregoing valuable withholding tax. This is a well-recognised stumbling block and progress in this respect will undoubtedly be slow in some markets: in the Philippines, for example, tax on financial transactions accounts for a large proportion of what is an otherwise insufficient and highly leaky tax base. Nations experiencing fiscal difficulties in the wake of the global slump will be reluctant to give up this critical and easily collected source of revenue.

Equity market: market cap to GDP ratio

Equity market: market cap to GDP ratio

Fewer barriers

According to Mr Thirachai, the ASEAN Secretariat, which is leading the implementation, is extremely conscious of this issue, and he notes optimistically that "the glass wall is coming down in various countries". Prompted by growing pressure on the baht, for example, the Bank of Thailand is in the process of liberalising foreign exchange controls. But the spectre of the Asian financial crisis, during which huge outward flows of capital from south-east Asian countries, including Thailand and Indonesia, wreaked havoc, also looms large in the minds of ASEAN policy-makers. Harmonisation, as shown for example through stock price and interest rate correlations, will see markets respond to future shocks in a similar way, thereby increasing the potential for contagion at times of market stress, say some onlookers.

Mr Kawai recognises these misgivings. He argues, however, that ASEAN policy-makers are fast-learning how to manage the issues. "It's a legitimate concern. But I think that, as the economies grow and financial markets become deeper, the regulatory authorities and macroeconomic policy-makers are increasingly aware and are learning how to cope with the risk of financial globalisation."

Financial regulation is another sensitive issue. According to Mr Thirachai, the ASEAN Secretariat is "working hard" on developing mutual recognition of standards among the regional regulators. In the view of HOSE's Mr Le, however, progress at the regulatory level has been sluggish, although he believes the obstacles to integration expand beyond regulatory harmony. "It's very hard to be harmonised to a common set of practices or principles. That is the challenge that we face right now. The middle layer of integration - the regulatory regimes - that is actually the toughest layer to get together. We see very strong country commitment out there but the middle [regulatory layer] is pretty dormant."

Measures taken during the past two years to strengthen the ASEAN Secretariat, in particular the 2008 ratification of the ASEAN Charter by which the body assumed legal powers, should, however, help push things forward. "The ASEAN Secretariat is supposed to have more teeth now," says Mr Thirachai. "Hopefully this will make all the countries toe the line more effectively."

Progress would be advanced by a further boost to the governance structure, says Mr Kawai. Although the crisis has to some extent forced ASEAN policy-makers to co-ordinate on monetary policy issues, this process is not formalised. ASEAN requires a centralised body, akin to the Financial Stability Board (FSB), that would help co-ordinate both pan-ASEAN monetary policy and monitor capital flows. "I think ASEAN is going to need an ASEAN version of the FSB, where central banks, finance ministers and regulators get together and exchange information, monitor market developments and capital flows, [to ensure] that systemic risk is eliminated. That mechanism could be very useful and could facilitate countries to take a more open policy toward financial integration," says Mr Kawai.

It remains to be seen if Vietnam, which assumed the leadership of ASEAN in January 2010, will act on these recommendations and continue to drive the agenda forward with the same vigour as its Thai neighbours.

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