ASEAN Economic Community
What it means for Financial Institutions
With the directives of AEC and ASEAN + 3 formally being implemented across the region, the overall financial services market landscape faces numerous challenges, namely:
- Changing needs of different types of customers
Needs of the local / regional / multinational companies operating domestically / regionally are changing based on the structural changes brought by enforcement of AEC directives. This has provided new sets of challenges for financial institutions to structure their operating model.
- Competitor plays
Increased inflow of financial services businesses from China, Japan and Korea into the ASEAN region as well as the consolidation/expansion of ASEAN financial services institutions, has led to greater competition amongst local / regional players in the market.
In light of this evolving environment, it is going to be important for financial services providers to re-visit their operating model in order to be better prepared for the upcoming changes and to create a winning play in the new ASEAN economic environment.
The ASEAN Economic Community (AEC) has prompted several structural changes across the landscape of the ten economies in Southeast Asia. These AEC directives are likely to underscore the opportunities and threats for financial Institutions operating in the region.
Key Statistics – ASEAN
- Home to 8.8% of the world’s population – approximately 600 million people
- Fourth largest GDP contributor in Asia with combined GDP of USD 2.1 trillion
- Intra-ASEAN trade crossed USD 500 billion at the end of 2011
- Intra-ASEAN FDI increased by 30% to reach USD 12 billion in 2010
With a total population of 600 million, ASEAN has grown rapidly to be one of the largest economies in the world with a combined GDP of over USD2.1 trillion. With the directives from the ASEAN Economic Community (AEC) gradually coming into effect, intra-ASEAN Foreign Direct Investments (FDIs) and trade have grown tremendously as corporations across the region continue to keep pace whilst enabling new economic opportunities. Intra-ASEAN trade crossed USD500 billion in 2011, whilst intra-ASEAN FDIs increased by 30% to reach USD12 billion in 2010.
In 2007, the ASEAN leaders affirmed their strong commitment to accelerate the establishment of an ASEAN Community by 2015. Along with the ASEAN Economic Community (AEC), the ASEAN + 3 (China, Japan and Korea) initiative has picked up pace through various legislatures and trade mechanisms, resulting in China, Japan and Korea contributing 36% share of the overall ASEAN trade. AEC envisages the following key characteristics:
a) A single market and production base;
b) A highly competitive economic region;
c) A region of equitable economic development; and
d) A region fully integrated into the global economy.
a) A single market and production base
An ASEAN single market and production base comprises five core elements:
- Free flow of goods;
- Free flow of services;
- Free flow of investment;
- Free flow of capital; and
- Free flow of skilled labour.
These directives have led the changes across the ASEAN landscape, especially in the priority integration sectors.
b) Competitive economic region
There are six core elements under the competitive economic region:
- Competition policy;
- Consumer protection;
- Intellectual property rights (IPR);
- Infrastructure development;
- Taxation; and
c) Equitable economic development
Under equitable economic developments, the initiatives are designed to move towards bridging the divide both at the small and medium enterprises (SME) level whilst enhancing the economic integration of Cambodia, Lao PDR, Myanmar and Vietnam to enable all member states to move forward in a unified manner.
d) Integration with global economy
The two approaches taken by ASEAN in integrating with the global economy are:
- A coherent approach towards external economic relations through Free Trade Agreements (FTAs) and Closer Economic Partnerships (CEP); and
- Enhanced participation in global supply networks.
Financial Services Landscape
The ASEAN financial services landscape has witnessed heightened activity across the different types of
- The regulators in each market are starting to decrease barriers to entry for ASEAN+3 institutions. For example, Malaysian banks have been the most active in establishing ASEANwide presence to leverage the growing influence of intra-ASEAN activities.
- Chinese and Japanese banks have increased their focus on ASEAN markets and are rapidly expanding their institutional and wealth-related offerings to serve clients pan-regionally.
- With the decrease in liquidity for the western banks, well capitalised ASEAN banks have been increasing their market share.
- New opportunities are being created for banks as their clients, including businesses, buyers, and suppliers) shift their FDIs and trade flows on the back of formulation of the AEC.
b) Securities Firms
- With the ASEAN equities exchanges coming together under the ASEAN Trading Link, the inter-connectivity is prompting local securities houses to increase their reach regionally. ASEAN brokerage houses have been active in the Merger & Acquisition market to enhance share or presence inorganically
- The ASEAN bond market is likely to undergo a lot of changes as well, with directives around cross-border issuances or distribution, and withholding tax is likely to get implemented by 2015
- The automotive industry is going through a systemic shift, with the traditional production bases like Thailand, for the large automobile manufacturers being challenged by other markets such as Indonesia and Vietnam.
- Leasing businesses are increasingly looking for regional opportunities either through alliances with Original Equipment Manufacturer (OEM) or bank-led expansions.
d) Asset Management
- The growth of personal wealth is leading to higher investments in mutual and private funds in the region.
- In the past, foreign asset management firms have been active in launching ASEAN- focused funds. However, the growth of the overall region is prompting them to explore alternatives such as partnerships with local asset management institutions, and proprietary set-ups.