ASEAN Capital Market Integration and Lessons from the European Union 44 th IAFEI World Congress: Global Recovery Amidst Reforms Makati Shangri-la 16 October 2014 Thiam Hee Ng, Senior Economist Asian Development Bank
Outline Introduction ASEAN Capital Market Integration Banking Bond and Equity Initiatives to Promote Integration Lessons from European Union Conclusions
Introduction Integration in ASEAN have been driven more by market forces rather than institutions. Region s economies have pursued export-led growth strategy. They have generally been open to trade and FDI from abroad. Trade Integration started early but financial integration catching up Economies have been removing barriers to capital flows and liberalizing their current accounts.
Stages of Integration 1. Free Trade Area 2. Customs Union 3. Common Market 4. Economic Union Banking Union Fiscal Union Monetary Union 5. Political Union
ASEAN Capital Market Integration Impetus was the 1997/98 Asian financial crisis which exposed the currency and maturity mismatch endemic in the region s financial system. Banks were borrowing short-term in foreign currency (usually US$) and lending it in local currency long-term. Authorities recognize the need to develop stronger and more robust regional financial markets to prevent a repeat of the crisis.
Financial integration lags behind trade While trade within the region is now mostly free of barriers, there are still significant barriers towards accessing each other s capital markets. Different rules and regulations make it difficult for investors to invest in their neighboring countries. However there are concerted efforts among the ASEAN+3 economies to further promote greater integration of financial markets. Over time, we expect the gap between financial to gradually catch up.
Banking Integration Banks are the most important financial institutions in ASEAN. So far, there has been little integration in the ASEAN banking sector. Non-regional banks (Standard Chartered, ANZ, MUFG) have larger footprint in ASEAN than regional ASEAN banks.
Banks presence in the region Number of countries present 10 9 8 8 8 7 6 Number of countries present (excluding home countries) 8 7 7 6 5 2 1 Note: Includes branch, representative office and subsidiary. Also includes recently issued banking licenses from Myanmar
Banking Sector Development Varies Source: IMF International Financial Statistics. Singapore, Vietnam and Lao data using old IFS reporting format
Malaysian and Singapore banks largest Source: Bloomberg
Top 3 banks by asset size (ASEAN 6) Indonesia Malaysia Philippines Singapore Thailand Vietnam BANK MANDIRI BANK RAKYAT INDONESIA BANK CENTRAL ASIA MALAYAN BANKING BHD CIMB GROUP HOLDINGS BHD PUBLIC BANK BHD BDO UNIBANK INC METRO BANK & TRUST CO BANK OF THE PHILIPPINE ISLANDS DBS GROUP HOLDINGS LTD OVERSEA-CHINESE BANKING CORP LTD UNITED OVERSEAS BANK LTD BANGKOK BANK PUB SIAM COMM BK PCL KRUNG THAI BANK VIETNAM JS COMMERCIAL BANK FOR INDUSTRY AND TRADE *BANK FOR FOREIGN TRADE OF VIETNAM JSC *MILITARY COMMERCIAL JS BANK *Several data not available for Vietnam s rank 2 bank
Indonesian banks most profitable Source: Bloomberg
Interest margin highest in Indonesia Source: Bloomberg
Philippines banks have high cost Source: Bloomberg
Promoting Banking Integration An integrated financial market requires participants to operate under a common set of rules and regulations. Greater integration in ASEAN would require a move towards harmonizing rules and regulations. But diversity in the financial development of ASEAN countries is hampering that. ASEAN Banking Framework is working to facilitate Qualified ASEAN Banks (QABs) entry into domestic banking markets.
Bond and Equity Market Integration Local Currency (LCY) bond market has grown tremendously since 2001. While government bonds have a bigger share of the market, corporate bonds are catching up. Malaysia, Singapore and Thailand all have well developed bond markets. Growing interest by foreign investors to invest in ASEAN bond markets.
Rapid growth in LCY bonds Emerging East Asia s LCY bond market reaches US$7.6 trillion at end-2013 Note: Emerging East Asia refers to the People s Republic of China; Hong Kong, China; Indonesia; the Republic of Korea; Malaysia; Philippines; Singapore; Thailand; and Viet Nam. Source: AsianBondsOnline.
Corporate bond market rising faster than government bond market % 35 Annual Growth Rates 30 25 20 15 10 5 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Government Bonds Corporate Bonds Note: Growth figures are based on end-december 2013 currency exchange rates and do not include currency effects.
PRC is the largest LCY bond market in the region Note: Data as of end-2013. Source: AsianBondsOnline.
Malaysia, Singapore and Thailand have well developed bond markets 140.00 LCY Bonds as a Share of GDP 120.00 100.00 80.00 60.00 40.00 20.00 0.00 Republic of Korea Malaysia Singapore Thailand Hong Kong, China People's Philippines Viet Nam Republic of China indonesia Note: Data as of end-2013. Source: AsianBondsOnline.
Bank loans are still the major source of debt financing 180.00 160.00 140.00 120.00 100.00 80.00 60.00 40.00 20.00 LCY Corporate Bonds and Bank Loans as % of GDP 0.00 People's Republic of China Hong Kong, China indonesia Republic of Korea Malaysia Philippines Singapore Thailand LCY Corporate Bonds as % of GDP Bank Loans as % of GDP Note: Data as of end-2013. Source: AsianBondsOnline.
Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Growing foreign interest in Indonesian, Malaysian and Thai bond markets % 40 Foreign Holdings of LCY Government Bonds 35 30 32.54 29.40 25 20 15 17.42 10 5 9.17 8.31 0 Japan Indonesia Malaysia Thailand Republic of Korea
Asian Bond Market Initiative Asian Bond Markets Initiative (ABMI) was started in 2003 to promote the development of local currency bond markets in Asia among ASEAN+3 countries. Asian Bonds Online. http://asianbondsonline.adb.org/ Asia Bond Monitor. http://asianbondsonline.adb.org/regional/abm.php
Asian Bond Market Forum Asian Bond Market Forum (ABMF) was established in 2010 to foster standardization of market practices and harmonization of regulations relating to cross-border bond transactions in the region. ASEAN+3 Multi-currency Bond Issuance Framework (AMBIF), a common regional bond issuance program, to allow qualified issuers from any country in ASEAN+3 to issue local currency bonds in any ASEAN+3 currency in the ASEAN+3 region. ABMF is also working to towards streamlining bond transaction flows including more simplified disclosure requirements. Also working to improve the regional cross-border settlement infrastructure through ASEAN+3 Cross-Border Settlement Infrastructure Forum.
Cross-border holdings of bonds have increased Traditionally, Asian investors have preferred to invest in their own home markets or in developed markets. But, we have seen intraregional holdings of debt securities continued rising. Intra-ASEAN5 bond holdings rose from 5.8% in 2001 to 11.0% in 2012. However, intra-regional holdings of equity is lower than bond at 8.8% in 2012 falling from more than 21% in 2001.
Intra-ASEAN5 holdings of bonds now higher than equity holdings % 45 Intra-Regional Equity and Debt Holdings 40 35 30 25 20 15 10 5 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Jun-13 Intra-ASEAN-5 Equity and Debt Holdings Intra-ASEAN-5 Debt Holdings Intra-ASEAN-5 Equity Holdings Intra-EU-5 Equity and Debt Holdings Intra-EU-5 Debt Holdings Intra-EU-5 Equity Holdings
European Financial Integration Single market for banks as part of the common market internal market. While there is common European rules, supervision remains mostly in national hands. Facilitated by the introduction of euro. Europe is currently working towards a banking union with Single Supervisory Mechanism and Single Resolution Mechanism.
EU vs ASEAN 2013 2013 GDP Growth 0.11% GDP Growth 4.7% GDP(Mn USD) 14,647,977 GDP (Mn USD) 1,363,415 Total Population 506,739,265 Total Population 615,676,470
European Commission vs ASEAN Secretariat European Commission Headquarters in Brussels, Belgium ASEAN Secretariat in Jakarta, Indonesia 2012 2012 Budget $4.3 billion Budget $16 million Number of employees 33,000 Number of employees 300
Benefits and Costs of Financial Benefits Integration Increased risk sharing through portfolio diversification. Entry of regional banks can ensure funds are channeled towards the most efficient use. Costs Contagion risk and Spillover effects. Increased risk taking and excessive leverage.
Experience of European Financial Integration Monetary union led to structural divergence. Core had 8% trade surplus while periphery had 8% trade deficit. Financial integration was incomplete The interbank market became rapidly highly integrated but retail banking remained largely fragmented along national lines. But during crisis, interbank lending dried up.
Intra-ASEAN-5 Bank Assets is at 6.7% of Total Banking Assets in ASEAN-5 % 16 Intra-ASEAN-5 Bank Assets as % of Total Bank Assets in ASEAN-5 % 16 Intra-EU-5 Bank Assets as a % of Total Bank Assets in EU-5 14 14 12 12 10 10 8 8 6 6 4 4 2 2 0 ASEAN-5 Indonesia Malaysia Philippines Singapore Thailand 0 EU-5 Italy France Germany Spain United Kingdom Note: Data as of end-2012. Source: Bank Indonesia, Bank Negara Malaysia, Bangko Sentral ng Pilipinas, Bankscope, and financial statements of respective banks.
Lessons for Asia Take a long term view and step by step approach. Ensure each stages are completed before taking the next one. Currency union much more demanding Proper bank regulation and supervision needed to ensure financial stability. Greater cross-border cooperation also essential. Strong domestic fiscal conditions and external balance are important for financial stability. Regional financial safety net can help during periods of liquidity crisis.
Conclusions Efforts to promote cross border trade in financial assets have been intensifying in ASEAN. Work is progressing to facilitate entries of regional banks into other ASEAN banking markets Local currency bond markets have flourished and there has been increasing intra-regional holdings of bonds. European experience suggests that financial integration is a long process and careful step by step approach is needed. Greater regional cooperation is needed to minimize the risks from integration.
Thank you Thiam Hee Ng thiamng@adb.org