The Association of South-east Asian Nations (Asean) has a flag. It has an anthem. It even has a basketball league and a bi-ennial football tournament. What it does not have is a single capital market worthy of the name. An ordinary retail investor in Kuala Lumpur has to jump through hoops to buy a share listed in Manila. A fixed-income fund manager in Singapore trying to buy a bond in Bangkok, meanwhile, would face a series of regulatory and technical hurdles.
This bloc of 10 south-east Asian nations, bound by trade and political links, is an increasingly vital engine of global economic growth. It contributes a bigger share of the world's gross domestic product (GDP) than India, with a population more than 50% larger than Brazil and Russia combined. Most of the region is operating at or above potential, with little collateral damage from the 2008-09 crisis. But it remains a loose grouping of relatively small capital markets, divided by different standards and technologies.
Asean could be a much more powerful force if it pursued a deeper integration, says Charon Wardini Mokhzani, deputy chief executive officer of corporate and investment banking at Malaysia’s CIMB Group, which is present in eight of the 10 Asean countries. “As a unit, we risk not being on the radar screen of global or regional investors,” he says. “In the long term, for us to stay relevant, the world has to see Asean as one capital market.”
Fragmentation issues
The consequences of fragmentation are various: high costs for issuers, [having to go from] market to market, and high costs for investors. Perhaps most significant is that this fast-developing region is failing to capture its own savings. Asean has become “an important source of capital in its own right”, says Cyn-Young Park, principal economist at the Asian Development Bank’s office of regional integration in Manila. But as the region remains a loose affiliation of small markets, much of that capital dribbles out into the US and Europe.
Instead of tapping its own abundant capital, the region continues to depend on external funds to finance internal investment. Outside investors, of course, may have different investment horizons. “This creates a source of instability: the classic ‘original sin’ of currency and maturity mismatch,” says Ms Park. “It will help us release tension if we fund from our own sources. We need to find ways to re-channel more Asean savings into the Asean economies.”
Making progress
The region’s integrator-in-chief, the Asean Capital Markets Forum (ACMF), has made a fair measure of progress since its founding in 2004. But in general, the pace of reform has been sluggish and uneven. Seven years on, Asean remains uncomfortably dependent on foreign investment flows, which means that asset prices are still hostage to the whims of US and European institutions, moving in and out on sentiment and momentum. Last year, for example, the FTSE Asean index, tracking 145 large and mid-cap companies from the 'Asean-5' of Indonesia, Malaysia, the Philippines, Singapore and Thailand, was one of the world’s best performers, up 24%, in constant currencies.
This year, though, it is among the most indifferent, down 3%, as foreign investors have switched into the bigger, more liquid markets of north Asia and Japan. Currencies, as a result, have been volatile: all bar the Vietnamese dong rose significantly against the US dollar last year. “Creating cross-market linkages should allow us to offset the impact of foreign money coming and going,” says Piyush Gupta, chief executive of Singapore-based DBS, the region’s largest bank by assets and market capitalisation.
Implementation plan
The ACMF, a congregation of capital market regulators from 10 countries (the big five, along with Brunei, Cambodia, Laos, Myanmar and Vietnam), was chaired from the outset by Thirachai Phuvanatnaranubala, secretary-general of the Securities and Exchange Commission of Thailand. For the first few years after its establishment it pursued a vague harmonisation agenda. In 2007 it gained a little urgency, as Asean member countries vowed to establish the region as a single market and production base by 2015. Two years later, elbowed into action by the global financial crisis, the ACMF came up with an implementation plan, and three over-arching objectives.
First, to create recognition of Asean as an asset class, so that financial products from each country should be viewed as belonging to a single, much broader category. At the moment, “cross-correlation between markets is not high enough to justify selection as single bloc”, says Pranay Gupta, chief investment officer at ING Investment Management Asia in Hong Kong, which oversees $85bn fund in institutional, retail and insurance money. “In more mature markets such as Taiwan or South Korea, asset-owners tend to rotate between sectors. In south-east Asia, they tend to rotate between countries. They rarely say, ‘let’s allocate to Asean'.”
The ACMF’s second aim was to upgrade Asean regulatory standards, bringing them into line with international best practices. Third, was to build trust in Asean standards through mutual recognition regimes. By pursuing all three, the ACMF hopes to facilitate longer-term flows into Asean markets, both from within the region and from outside it.
Dogged by delays
These are no modest ambitions. "What we are essentially trying to do is to move transactions from commercial banking channels, where you have had rules and regulations in place for hundreds of years, to capital markets, which are much less mature,” says Mr Thirachai, who will step down as ACMF chairman at the end of this year. “We need to clear the way in terms of regulations, procedures and the legal framework. The work to be done is huge. It is not surprising that there have been delays here and there.”
Delays have certainly dogged the Asean trading link, which was thought to be among the least contentious elements of the 2009 plan (the particularly thorny parts, such as mechanisms to resolve disputes between market participants, and eliminating double taxation, have yet to be tackled). The idea behind the trading link is that brokers in one market should be able to view consolidated market data from all participating exchanges, and should be able to execute trades directly on the other markets, sponsored by a local member broker. Home-market rules on enforcement and investigation will prevail, with clearing and settlement intermediated by home-exchange entities. “Asean needs to upgrade its capital markets to stay competitive,” says Yusli Mohamed Yusoff, chief executive officer of Bursa Malaysia. “The new links should make cross-border trading much more efficient than existing practices.”
That is easier said than done, however. The trading link had been supposed to go live in 2010; the timetable was then pushed to the end of the first quarter 2011. Having completed the design phase for the infrastructure in early February, the two frontrunners – Malaysia and Thailand – are now seeking a technology vendor, with a view to going live by the end of this year. Singapore and the Philippines may join the network soon after. Even now, Indonesia and Vietnam have yet to commit themselves fully to the project.
Hurdles to clear
The biggest hurdle in initiatives such as this, says Mr Thirachai, is opposition from private-sector brokers and exchange operators. “People fear that the opening of markets represents a threat. Until now, they’ve been protected by rules that prevent capital flowing freely across borders with just one click. We need to convince them of the benefits.” The chairman cites Norex, an alliance of Nordic and Baltic countries’ stock exchanges formed in the late 1990s, which ultimately helped to boost volumes in Riga, Tallinn and Vilnius as much as Stockholm, Oslo, Copenhagen, Helsinki or Reykjavik. “What Norex showed was that there is a correlation between the size of transactions, the unit cost and the velocity of the market. We’re trying to create a bigger cake for everybody.”
As true as that is, fears of marginalisation seem legitimate – especially as the chief executive of SGX, the Singapore exchange, has been spelling out his vision of seven financial centres across Asia (Mumbai, Hong Kong, Shanghai, Seoul, Tokyo and Sydney) in support of his proposed merger with ASX of Australia. If that deal happens, what does that imply for Jakarta, or Bangkok? It seems significant that executives at the Thai exchange, the region’s fourth largest by market value, have recently started to talk of raising funds to expand and compete with rivals.
Disparate markets
Asean, after all, is a collection of “different markets at very different stages of development”, says Helman Sitohang, co-head of investment banking and chief executive for south-east Asia at Credit Suisse. Singapore’s nominal GDP per capita, for example, is more than twice that of the other Asean-5 members combined. Its equity market capitalisation, at about 145% of GDP, is more than seven times that of Indonesia (19%). By the second quarter of 2011, the SGX plans to offer non-stop, 9-to-5 trading for its 774 stocks. Contrast Laos, which trades just two stocks in three-hour daily sessions, or Cambodia, which is planning to launch an exchange in July.
Bond markets, too, differ not just in size – Indonesia’s local-currency bond market is equivalent to 15% of GDP (in Malaysia it is 99%) – but in the profiles of investors. While Singapore and Malaysia have broad bases of banks, insurers, pension funds and government-related entities, Thailand is more reliant on retail, while the Philippines’ market is dominated by private banks. Investors operating across borders face restrictions on foreign-exchange convertibility and repatriation, onerous requirements on investor registration, and conflicting standards on rating requirements, securities numbering and settlement.
The result is that cross-border transaction costs in the Asean+3 region (the 10 Asean countries plus China, Japan and South Korea) are typically about three times higher than in the US or Europe. From an issuer’s perspective, “the cost of going market to market, getting different clearances for each, remains very expensive,” says Mr Gupta of DBS. “For companies to believe it makes sense to raise capital within Asean, the cost has to come down dramatically.”
Ready for collaboration
The ACMF is supported on the fixed-income front by the Asean+3 Bond Market Forum, a group of market practitioners that met for the first time in September 2010 in Tokyo to discuss the harmonisation of rules across Asean, China, South Korea and Japan. The bottom line, though, is that many Asean nations are just not used to collaborative development of their financial systems. It is one thing to sign up to initiatives such as the Chiang Mai system of currency swaps, under which these 13 nations agreed to chip in small fractions of their foreign exchange reserves to create a regional pool to address short-term liquidity problems. But when it comes to day-to-day matters of operational sovereignty in financial markets, memories run deep of the regional balance-of-payments crisis of 1997-98, from which the countries most affected – Thailand, Indonesia and Malaysia – each found their own way out.
During the financial panic of 2008-09, moreover, it escaped nobody’s attention that the more open the market – New Zealand, Singapore, Hong Kong – the harder it was hit. “The lessons many nations learned was that they needed to maintain the security and stability of their own systems,” says Mike Smith, chief executive of ANZ, the Australian bank pursuing a growth strategy with an emphasis on emerging Asia. “With liberalisation comes contagion, to a certain extent.”
All this explains why Mr Thirachai, in his seven years chairing the ACMF, has learned to put a premium on pragmatism. When it came to devising a single set of disclosure standards for cross-border offerings of equities and bonds, for example, Mr Thirachai settled on a series of core Asean standards, supplemented by additional local requirements he called 'Plus'. Malaysia, Singapore and Thailand have adopted them; others should follow soon. “The eventual goal is to get rid of the ‘Plus’, so as to enable issuers to tap savings in all Asean countries using just one single set of documents, like a passport.”
It is noteworthy, perhaps, that the 2015 rubric from the Jakarta-based Asean talks of transforming Asean into a region “with free movement of goods, services, investment and skilled labour, and the freer flow of capital”. Freer, not free. In this complex, multi-year project, every little counts.
