The 10 members of the Association of Southeast Asian Nations are diverse and varied. If they can be unified with technology and a consistent focus on regulation, this might be the year they finally prosper.
This just might be the year the Association of Southeast Asian Nations (ASEAN) starts to play a larger role in Asia’s economic renaissance, given the region’s success in attracting more foreign direct investment, improving its infrastructure and welcoming more of its 640 million citizens into the ranks of the middle class.
Projected 2018 growth rates for the 10-nation bloc – from Indonesia to Vietnam, the Philippines to Thailand – are just above 5 percent, with exports, investment and increased consumption driving much of the action.
Despite the reasons for optimism, ASEAN’s capital markets still face development hurdles. Chief among them is the challenge of integration.
To increase transparency and liquidity, and improve the region’s risk profile, ASEAN’s capital markets must push forward with more integration and its banks and corporations prepare for the inevitability of deeper ties across the region.
The fact remains the region’s greatest strength – its political, economic, and cultural diversity – is also, paradoxically, one of its greatest challenges. Such diversity creates a fragmented landscape of varying rules, standards and expectations.
Just look at the basic facts: Singapore is one of the world’s wealthiest economies, while Myanmar is one of the poorest. Likewise, Indonesia is a democracy, while Vietnam is a single-party system. Add numerous languages and currencies into the mix and the integration challenges can appear intimidating and, in some cases, insurmountable.
Embracing global regulations – across all of ASEAN
Perhaps the first step toward greater integration for ASEAN’s capital markets is for the region’s banks and regulators to get ahead of the curve and prepare for the roll out of new global regulations before they even need to.
Nowadays, the pace of international regulatory reform is dizzying – whether that’s MiFID II, the Common Reporting Standard, or new code of conduct or liquidity threshold regulations emerging from the United States or the eEurozone.
Of course, many financial institutions in developing ASEAN countries such as Cambodia and Myanmar might wonder why they should absorb the costs of embracing such regulations if it is not yet required in their jurisdiction. After all, complying with new regulations is expensive, as it almost always involves some degree of internal restructuring.
But the upsides to taking a proactive approach will eventually outweigh any short-term pain. Getting up to speed sooner rather than later will not only free ASEAN’s banks to conduct more efficient business with their international counterparts; it will also create a level playing field and improve their ability to freely transact across ASEAN’s own borders.
In short, the opportunities unleashed by regulatory consistency are massive, whether that’s cross-border stock-exchange link ups, more fund passporting schemes, or greater ability to pool a diverse range of international investors to finance large infrastructure projects.
Technology and financial innovation in the region
Further integration on the regulatory front is one challenge. On the other side of the spectrum is the issue of new technology – which, in theory, should also lower financial crime risks, boost transparency, and pave the way for more integration of ASEAN’s capital markets.
Big Data, for instance, and its associated technologies, including machine learning and artificial intelligence (AI), have the potential to significantly improve the accuracy of decision-making at banks and financial institutions, optimizing regulatory compliance and customer due diligence. Whether to eliminate cyber threats or dismantle complex terrorist financing and money laundering networks, technology, combined with sophisticated data analytics, offers the financial sector new methods to ensure economic security.
In November 2017, the Monetary Authority of Singapore (MAS) launched a FinTech sandbox for financial institutions and fintech firms as part of the ASEAN Financial Innovation Network (AFIN). The initiative, introduced in partnership with the International Finance Corporation (IFC) and the ASEAN Bankers Association (ABA), will provide a platform for industry collaboration in the technology space, and support financial inclusion in less developed markets within the region. The initiative is a step in the right direction and should be cited as an example for further cooperation between members of the ASEAN bloc.
However, ASEAN’s major regulatory and financial institutions first need to agree on which technologies the region wants to embrace and establish relevant standards, including but not limited to cross-border payment systems, RegTech solutions and mobile banking platforms. For this to happen, the region’s regulators must exchange information about best practices related to risk management, consumer protection and data security on a regular basis.
Healthier earnings – and an end to financial crime
Should ASEAN develop a consistent approach to new regulations and new technologies, it will become easier for the region’s major firms to improve corporate governance and, in turn, improve their risk profiles, potentially boosting investment across the entire bloc.
As with many developing regions that lack regulatory consistency, financial crime is an issue in ASEAN. The right technologies, if embraced across ASEAN’s major markets, will free ASEAN’s firms to focus on long-term performance and healthier and more stable earnings while also committing themselves to better codes of conduct.
This focus on governance should eventually make ASEAN’s exchanges desirable listing homes for reputable companies, and able to attract capital from a diverse range investor groups all around the world.
The feedback loop is self-reinforcing: Better communication between ASEAN states results in more consistent regulation; more consistent regulation results in agreement about new technologies; equal application of new technologies improves corporate governance and performance and creates better investment opportunities.
Support more intra-ASEAN trade
Which brings me to my final point: ASEAN’s economies need to invest in each other via more intra-regional trade. According to some estimates, ASEAN intra-regional trade has stagnated at roughly 25 percent for two decades. Just about 20 percent of foreign direct investment into ASEAN originates in the region.
To be sure, the establishment of the ASEAN Economic Community (AEC) in 2015, and the appointed cross currency dealer (ACCD) settlement initiatives across Indonesia, Malaysia and Thailand are significant steps in the right direction; as is the plan to link up the Singapore Exchange and Bursa Malaysia, which is due before the end of the year. This scheme will hopefully boost liquidity and encourage more cross border investment between two of the region’s most dynamic economies. Let’s hope the arrangement delivers more than eye-grabbing headlines.
The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and other trade initiatives should also help – even despite the U.S.’s ambivalence. But in the meantime, the goal for ASEAN’s governments and corporations is to balance their self-interests with the interests of the collective. ASEAN’s leaders must accept that integration is the only way forward if they want the region to reach its full potential.
Hear more about the latest regulatory and industry initiatives targeted at supporting ASEAN financial integration at the ASEAN Regulatory Summit 2018, taking place on May 8 in Singapore.