The process is slow because members are not at all homogeneous, says Cedric Chehab, Head of Asia Research at BMI Research
Giovanni Puglisi
May 11, 2015: ASEAN members have stepped up efforts to create a single economic market by agreeing on a Banking Integration Framework, which aim is to strengthen the regional banks’ long-term competitiveness and support expansion across the region to compete both domestically and with foreign banks. IFM spoke to Cedric Chehab, Head of Asia Research at BMI Research, to better understand the impact of the agreement on both banking and on the other sectors of the economy.
An integrated financial services sector and capital markets are undoubtedly crucial for AEC growth. ASEAN members have recently taken another important step toward further economic market integration by agreeing on a Banking Integration Framework. What does it mean for AEC and what impact will it have on other sectors? Banking sector penetration across ASEAN remains low by regional and global standards. As such, a stronger framework will certainly be a positive development as it will further encourage stability and growth for the banking sector. Specifically, the ASEAN Banking Integration Framework (ABIF) will allow qualified banks to operate across ASEAN as if they were a local bank, and this will probably result in the emergence of some powerful regional players going forward. Ultimately, greater competition and/or economies of scale could result in a better deal for consumers.
That said, the journey to get to that point will likely be long, and may face significant hurdles. Not only is it slated to be implemented by 2020, which is still five years away, but we would not be surprised to see political hurdles. For instance, the current and future size of Indonesia’s banking sector is an extremely attractive proposition for Singaporean and Malaysian banks. However, as we saw in 2013, the Indonesian government may not be so amenable to opening up the sector to a large amount of competition, as it would ultimately be forcing many of the smaller domestic players out of business, which would be a political nightmare. As such, while we will likely see greater cross-border investments and the emergence of regional banks, we imagine that it will not be a straight line path. As most of ASEAN agreements, the ABIF is based on bilateral reciprocity. Could the absence of a single standard framework and an ever increasing “more carrot less stick approach” without or with limited sanctions be regarded as a credibility problem by investors? The lack of a single framework poses risks to the enforcement of certain standards and rules as it is a weaker form of a binding agreement. There are two challenges here. First, whether or not there is sufficient institutional capacity for some of these governments to implement these regulatory changes, and second, their ability and willingness to enforce them. Moreover, this also leaves room for governments to interpret and negotiate on the terms of agreements, to best suit their interests. Failure on either of these fronts could prove quite frustrating for investors looking to expand across the region. Arguably retail, wholesaling and transport are the sectors that have most benefited from reduced tariffs. Which sector will be next on the list? Could 2015 be considered as the year of liberalisation for the finance and insurance sectors in the region? We believe that improved payments across the region under the framework of the AEC and also the ABIF will benefit the development of e-commerce, which is one of the key goals. Looking at finance and insurance, we think the impact will be more limited than in many other areas of the regional economy. In fact, we expect full liberalisation to only realistically take place long after ‘Vision 2020’. Our view is predicated on the strong likelihood of some governments and regulatory bodies resisting the liberalisation of certain areas in order to protect their domestic markets. However, we believe there will be progress among member states in achieving many of the goals of a common financial services market in the coming years and when considered as an aggregate, there will be considerable opportunities within the sizable commercial banking sector of the ASEAN region. Compared with the regional banking sector, we see the AEC having a more immediate impact on the ASEAN insurance industry. The removal of government price controls in certain insurance lines such as motor and fire insurance in various ASEAN countries by 2016 will lead to a shake-up of the competitive landscape in these local markets. Gaps remain between the region’s larger and smaller economies in areas such as trade facilitation and investment liberalisation while services trade has proved harder to liberalise. Is this slow path of integration facilitating and reducing the risk of unintended shocks for “junior” members such as Laos and Cambodia? Absolutely. The members of ASEAN are not at all homogeneous, and as such there are large differences in terms of the structure of their economies as well as their institutional capacity to implement reforms. If you think about this practically, Singapore has very strong institutions and can respond very quickly to changes. However, on the other hand, countries such as Myanmar, Cambodia and Laos are less developed and would struggle in the face of full liberalisation. These countries also have special agreements which will see a slower process of integration, whereby tariffs are reduced over a longer time period. Given these dynamics, we do not believe that the 2015 target for full integration will be met. That is not to say that it will not happen, because it will. It will just take more time to get there. Moreover, this slow process helps to protect these smaller economies from the shocks associated with rapid liberalisation, which can often be very damaging over the short term.
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