ASEAN Financial Integration: Pros and cons

According to the Institute for Development and Econometric Analysis, Inc., the ASEAN financial integration will be accomplished through the following initiatives: (a.) Financial Services Liberalization, including Banking Integration. Restrictions on ASEAN banks, insurance companies or investment companies will be gradually removed. (b.) Capital Account Liberalization. Restrictions on foreign exchange transactions such as those in the current account, foreign direct investments, portfolio investments and other flows will be gradually removed to achieve freer flow of capital. (c.) Capital Market Development. Aimed at developing the region’s capital market, domestic laws and regulations will be harmonized, and market infrastructure will be linked. (d.) Harmonized Payments & Settlement Systems.

The integration will improve the health of the Philippine financial sector and hence lead to more jobs. Increased competition and technology transfer will increase efficiency. Integration will also open up microfinance and insurance to a larger consumer base, including the poor. Nevertheless, interdependence raises the risk of contagion. Sound and consistent macroeconomic policies are necessary to keep financial contagions and crises at bay, according to IDEA.

Only the amount of financial assets in relation to GDP of Malaysia and Singapore compare favorably to the OECD average. Thailand, the Philippines and Indonesia fall within the range of their peers of similar per capita income level. In contrast, Brunei, which has a high income per capita, has a low level of financial assets compared to its peers. Cambodia, Laos and Myanmar’s financial sectors are undeveloped given the very low amount of financial assets in these countries. All ASEAN members except for Singapore and Malaysia have a long way to go in deepening the financial sector and developing capital markets in order to reach the status of high-income OECD countries.

With the exception of Singapore and Malaysia, ASEAN’s domestic financial systems largely remain bank-based. However, well-developed capital markets do exist in the other ASEAN members. Reforms were introduced after the 1997 financial crisis. In contrast, the low-income member countries have much less developed capital markets, if at all. ASEAN capital markets are small by the standards of capital markets in the advanced countries outside the region. The long-run solution may be to create a consolidated region-wide market for all securities issued within the region.

The Philippines, Indonesia, and Viet Nam rank low in the global financial development ranking of World Economic Forum’s Financial Development Report, but Singapore and Malaysia rank high. The ranking includes fifty-seven countries from 2008 to 2011 and consists of several components. Broken down by components, ASEAN has a relatively good score for financial stability. The Philippines lags in business environment and financial access.

The ASEAN’s national agenda is clear. Strong banking sectors and first shoots of capital markets have to be developed in Brunei, Cambodia, Lao and Myanmar. The quality of capital markets in Indonesia, the Philippines, Thailand and Viet Nam have to be raised closer to a level seen in Malaysia and Singapore. Financial access, stability and business environment in these countries also have to be improved according to the researchers of IDEA.

For comments, rejoinders and questions on credit and collection matters, Mr. Ed F. Limtingco can be reached at [email protected].