ASEAN’s Wayward Community Comity

With the ten-nation ASEAN Economic Community going into effect this year, an IMF working paper urged faster financial integration despite the consensus-driven deliberate regional “way “ among the range of members at all income levels. It applauds greater banking and capital market linkages since the late 1990s crisis, but notes that further financial services strides could offset the fallout from higher global interest rates and promote inclusion to reduce poverty. The Fund added that despite safety nets in place like the Chiang Mai multilateral currency swap initiative, East Asia was hit by the mid-2013 Federal Reserve monetary policy scare and further protections could be considered with cautious capital account liberalization. Trade openness is already large with imports and exports above 100 percent of GDP outside Indonesia, Myanmar and the Philippines. Intra-ASEAN commerce, mainly geared to consumer good supply chains, has quadrupled to $650 billion since 2000. Banking and securities market ties have lagged the pace except for Hong Kong and Singapore and are behind the Eastern Europe and Latin America norm as well. FDI flows were a record $125 billion in 2013, bur foreign ownership limits are often in places especially in the services sector. Global banks have raised exposure in Indonesia, Malaysia and Thailand from a low base but ASEAN-based bilateral shares are “particularly low,’’ according to the Asian Development Bank with the Philippines at under half a percent of system assets. Cross-border portfolio investment is up with the aid of the local currency Asian Bond Market Initiative and stock market cross-trading between Malaysia, Singapore and Thailand. Interest rate and bond yield disparities linger while co-movement has increased between equities, the ADB finds. The February 2014 summit in Yangon held a working group meeting on capital market development to plan next steps but the process remains “long and drawn-out.” A key integration driver should be poorer economy catch-up with private sector credit/GDP below 50 percent in these frontier markets. A better split between state and non-state institutions and improved regulatory oversight and harmonization are also elements of cooperation identified in the latest Economic Community blueprint. Supervisors in three countries have agreed to a mutual fund offering regime across jurisdictions, but EU-style frameworks for a single operating passport and supervisory mechanism are remote. Bank access will move at different speeds as home and host country joint recognition practice may hinder consolidated approaches and branch versus subsidiary preferences stay prominent.

Europe’s model also stems from the single currency in comparison with Asia’s multiple exchange rates. Despite trillions of dollars in near-term education and infrastructure needs big ASEAN members are net capital exporters as official reserves in particular are recycled in liquid markets abroad in the absence of regional channels. According to the Fund restrictions in place on offshore currency use reinforce the cycle, and the pattern is further solidified when ASEAN+3 arrangements with China, Japan and Korea present a way forward.