The complexities of leadership, the balancing of economies at very diverse stages of development, an infrastructure deficit, these were not unexpected hurdles but there were some deeper issues raised, what the research termed “necessary preconditions for the successful integration of the economies within ASEAN”.
" There has been limited progress on deepening capital markets and liberalising financial and capital accounts."
Financial integration was the major one. For all the promise of a shift of the manufacturing centre of gravity away from China to ASEAN, the benefits of urbanisation and a growing middle class, the long mooted emergence of an economic community was a disappointing laggard.
Certainly, the financial services sector in the region will grow, to support the growth predictions and in expectation of the commencement of the ASEAN Economic Community (AEC) in December. But as the report's principal author, Glenn Maguire, ANZ's chief economist for South Asia, ASEAN and the Pacific, noted at the report's launch, the AEC was one driver not firing on all cylinders.
There has been limited progress on deepening capital markets and liberalising financial and capital accounts. There's no immediate sign of break throughs and the institutions necessary to run such a community are next to non-existent.
As Maguire pointed out, the European Union has some 30,000 odd staff and dozens of institutions, the ASEAN secretariat 300. That's not to say what's needed is more bureaucrats for the sake of it but financial deepening does require administration, regulation, governance and operations at a trans-national level.
As the report says: “The surge in intra-regional ASEAN trade requires banking realignment. Steps are being taken to address the current misalignment, but it's too early to see real progress. The ASEAN Banking Integration Framework (ABIF) is intended to liberalise the banking market by 2020, helping pave the way for further integration and the entry of ASEAN banks into other regional banking markets.”
But then take a step back. Maguire says the pace may be slower but it's not off track or stopped. Nor did the research team find anything in their work for the ASEAN report which caused second thoughts about last year's insight report Caged Tiger: The Transformation of the Asian Financial System.
The central projections of that report were “10 key Asian economies will together come to dominate global finance” – and there was unsurprisingly considerable overlap between those 10 and ASEAN, including Indonesia, Malaysia, Thailand, Singapore, Philippines and Vietnam.
The essence of Caged Tiger was the importance of Europe and the US as the “deepest” financial centres – in terms of market capitalisation and product and institutional diversity - will shrink.
“That will mean the emergence of multiple financial centres (in Asia, increasingly sophisticated financial products and firms which invest in them,” the research found. “Asia will increasingly finance Asia. ANZ estimates the region's financial system could be as large as $US200 trillion by 2030. This would make it about four times the current size of the Asian financial system and more than twice as big as we project the US financial system to be in 2030.”
That scenario remains intact in the longer term.
And consider the AsiaLink Business report of two weeks ago, Australia's Jobs Future - The Rise of Asia and the Services Opportunity. While focussed on Australia, the analysis showed the enormous and unappreciated role of the services sector, something only hinted at in Australia's reputation as a “quarry, farm and beach”.
For Singapore, the advanced economic keystone in the ASEAN arch, the financial maturation of ASEAN will be most beneficial – fortuitously as, like Australia, it faces the challenge of the traditional pillars of its economy being less able to support the weight of the nation. In Australia, that's resource extraction, in Singapore, manufacturing.
The ASEAN report noted this shift. “Production platforms in Asia are moving south into ASEAN. The Mekong Frontier provides cheap and youthful labour, production platforms are being established in the mid-manufacturing countries, and comfortably high income economies such as Singapore and Malaysia are doing the higher value-added activities such as designing electronic circuits and providing financial services.”
Meanwhile, “in our view, a borderless economic community will not emerge for at least another 15 years and, even then, it is unlikely to develop into a bureaucratically administered entity like the European Union”.
In particular, Maguire's team forecast progress in regulatory harmonisation will be slow, growing the loan to deposit ratio in national systems – ie financing for the economy – will be slow and global regulation coupled with risk aversion by the banks will likely constrain cross-border activity.
“This reinforces our view that the progress in financial integration will be gradual and is unlikely to be fully integrated in the near term,” the report said.
Yet, again, it would be wrong to assume that slower than hoped pace on financial integration means ASEAN will be low growth for the financial services sector. Indeed, based on the data in these reports – and acknowledging the fact I work for a bank which clearly buys into the Asia growth story – financial services will be one of the great opportunities.
That's because even the initial stages of ASEAN's growth and fundamental moves like bridging the infrastructure gap will require finance. More of which will come from within Asia via institutions growing in the region.
For example, Singapore played an important facilitation role in the establishment of the 'ASEAN Trading Link' which now offers a single point of entry for the three largest equity markets in ASEAN – Singapore, Malaysia and Thailand.
Singapore, but also Australia and Hong Kong, can offer the whole suite of financial services including asset management, insurance, debt and equity capital markets, derivatives and foreign exchange.
Moreover, foreign direct investment from the established capital pools of the northern hemisphere, but particularly Europe, will flow into what ANZ calls “the full spectrum of industries within ASEAN, from manufacturing to financial services and insurance”.
For the moment, and despite the slow pace of integration, there is opportunity for banks with the specific qualifications to work across borders in the region.
The AEC may be the laggard in the ASEAN story but that doesn't mean financial services are not a big chapter.