Asean capital markets integration: around the corner?

By the end of 2015, the Association of South-east Asian Nations (Asean) expects to make significant progress in paving the road for integration of its capital markets and financial services by 2020. The group aims to achieve this through progressive liberalisation and harmonisation of markets. In particular, Asean has in its crosshairs capital market development, harmonisation of settlement systems, bond issuance and governance.

One of the hallmarks of integration so far was the launch of Asean Exchanges in 2011, a collaboration between six Asean member countries – Indonesia, Malaysia, Thailand, Singapore, Philippines and Vietnam. 

The largest achievement of the exchange to date is more limited in scope. In 2012, the Asean trading link was introduced, a platform that allows participating brokers to execute trades in connected exchanges without having to be licensed by them. On the launch of the platform, only three countries signed up – Singapore and Malaysia in September and Thailand a month after. Almost three years later, the number of trading link members remains the same, with Indonesia, which is the region’s largest economy, delaying joining up to the scheme. 

The delay could be caused by concerns about competition. As chart one shows, Indonesia has the smallest local currency bond market as a percentage of total GDP, and the country’s legislation does not have provisions for foreign investors making initial public offerings.

Philippine Stock Exchange (PSE) has expressed a wish to join, but the bourse needs to qualify as a member of the International Organisation of Securities Commission (IOSCO) before becoming a member.  

Malaysia, Singapore and Thailand are also the only Asean countries in which offering of equity and debt has been harmonised by adoption of the Asean disclosure standards, which are benchmarked against IOSCO’s standards. However, with PSE seeking to become a member of IOSCO, it will not be long before it too will adopt the Asean disclosure standards.

World of difference

In the highly fragmented and diversified world of Asean capital markets, it is no coincidence that Malaysia, Singapore and Thailand move together.

The more recent members of Asean – Brunei, Cambodia, Laos and Myanmar – all have embryonic bond markets. The Cambodian government does not issue bonds and Brunei, with the population of only 418,000 is dwarfed by its neighbours.

In contrast, the big three lead the region in terms of capital market development. At $81.63bn in December of 2014, Singapore is the largest bond issuer in the region, followed by Thailand and Malaysia, with issues of $57.64bn and $33.69bn, respectively.

As can be seen in chart two, companies in the three countries also share the same sort of funding profiles, with equity the most common source of credit – especially in Singapore where, in June of 2013, equity constituted 58.25% of all local company financing. Then, businesses resort to domestic loans, although much less so in Singapore, where loans account for 23.23% of financing, compared with more than 30% in both Thailand and Malaysia. Bonds are most popular in Thailand and least popular in Singapore, where they amounted for only 18.52% of funding in June of 2013. In all three countries, bonds were the least common option for funding among firms.

Secondary market liquidity is low for the entire region, as bonds are typically held to maturity, and there is a shortage of market-makers. 

Even in the more advanced capital markets of Singapore, Malaysia and Thailand, small size and low liquidity remain a problem. Integration will help the member exchanges address that, in addition to opening up markets to investors in corporate bonds and tapping a new source of funding for local companies.