14 July 2005, Kuala Lumpur, Malaysia

"Towards an Integrated ASEAN Capital Market"

1   I would like to first thank Bank Negara Malaysia and the European Commission for the invitation to speak at this Euro Conference.

2   It is always daunting to speak after two esteemed panellist members but allow me to pick up from Mr Camacho's remarks and share some additional thoughts on the efforts toward an integrated ASEAN capital market. Singapore is supportive of regional capital market developments and will continue to contribute to the co-ordinated efforts in this regard.

3   Let me start by painting the ASEAN capital market landscape a little more, against an economic backdrop. ASEAN is building itself into an attractive investment and financing destination.  You have already heard some of the facts and figures.  Let me just cite a few additional 'headline' numbers. A Finance Asia report cited an estimate of USD 461 billion that will be invested in various transport and energy infrastructure projects in Southeast Asia over the next 15 years; Indonesia alone to spend USD 76 billion this year; while Thailand to spend some USD 45 billion over the next five years.  A lot of these investments will go into developing ASEAN's vast natural resources and in bringing them to market, including gas, oil and tin.

4   ASEAN has a market size of over half a billion people - which is larger than Europe's population.  ASEAN is also one of the fastest growing regions in the world.  In 2004, ASEAN grew on average 6.3%, compared with the global average of 5%. Based on current growth trends, the combined GDP of ASEAN could reach USD 1 trillion by 2010.  If you couple this with the strong growth in domestic demand and the emergence of a larger middle class of consumers, then private demand will surely create another surge for financing activities.

5   ASEAN's production chains are one of the most, if not the most, interconnected with the rest of the world.  There are a number of Free Trade Agreements (FTA) at the specific country level, and also for ASEAN as a bloc. China and India have already entered into FTA negotiations with ASEAN that are due to be completed by 2010 and 2011 respectively.  In fact, for the goods chapter, the ASEAN-China FTA entered into force on 1 July that reduced duties on some 7,400 line items. This will benefit ASEAN, underscoring the region as a centre of a production network that exports upstream components to China for final assembly.

6   Correspondingly, intra-Asian trade has risen from about 32% of total exports in 1990 to more than 40% in 2004 - a pace that is twice as fast as intra-European Union and intra-North American Free Trade Agreement trade - and is set to grow further with these regional FTAs. On top of that, total trade between Europe and Asia has grown significantly in absolute terms - amounting to over USD 570 billion in 2003 alone, with European exports to Asia growing by 19% and imports growing by 24%.

7   Earnings-conscious investors will recognise that several jurisdictions in ASEAN are also well connected in a network of tax treaties for the avoidance of double taxation, which makes ASEAN an efficient tax domicile for investments.

8   Credit-conscious investors will also find a diversity of credits among ASEAN sovereign debt. And credit quality has generally improved over the past few years, reflecting progress on some key structural reforms (like corporate de-leveraging, labour force restructuring, disposal of Non-performing loans and reopening of markets to foreign investment) even though more work remains to be done. ASEAN investment assets are also, to me, a natural choice for diversification because of their relatively low correlation with US treasuries (bonds) and S&P 500 (equities). The challenge will be to improve market breadth and depth, and to enhance liquidity in ASEAN markets.

9   Not surprisingly, ASEAN also possesses several qualities that make it an attractive fund-raising region in Asia.  First, developing Asia has the highest savings rate in the world (38% of GDP in 2004) and is projected to rise in 2005 to over 39% of GDP.

10   Second, the growing number of High Net Worth Individuals (HNWIs) also provide a ready investor class that has increased retail demand for new investment instruments, including estate and trust planning.  In the latest Cap Gemini-Merrill Lynch World Wealth Report 2005, the number of HNWIs in the Asia Pacific grew by 8.2% between 2003 and 2004, and their assets increased by 8.5% to USD 7.2 trillion at the same time.  In Singapore alone, the number of HNWIs leaped by 22.4% last year.

11   Europe already recognises the potential of ASEAN.  European investors have been showing strong demand for ASEAN debt, both in G3 currencies and increasingly in ASEAN currencies, in their bid to diversify their portfolio and to benefit from Asia's growth.  We have seen AAA-rated tranches of Asian Asset-Backed Securities, including the Commercial Mortgage-Backed Securities portion of Real Estate Investment Trusts from Singapore, being placed largely in Europe.  European bond issuers are also increasing their forays into the ASEAN investor base, tapping the fast-growing demand for fixed-income assets from central banks, pension funds and private accounts.  In the recent Kreditanstalt fur Kwiederaufbau (KfW) five-year global bond launched in January 2005, over 40% of the paper were placed in Asia, of which a sizeable chunk came to ASEAN.  KfW, the European Bank for Reconstruction and Development, the Nordic Investment Bank and various other European institutions have also issued, for example, Singapore dollar bonds.   

12   So it sounds like an overall rosy story.  And you may ask - is there a need to integrate ASEAN capital markets? In my view, there are two broad reasons to do so. First, the economic links between ASEAN countries are strong and can be stronger through greater market integration. 23% of total ASEAN trade is done between ASEAN members. 11% of ASEAN Foreign Direct Investments are intra-ASEAN in nature. Integrating the capital markets of ASEAN countries will bring their economies even closer together. A McKinsey study estimated that an integrated ASEAN economy can boost the region's GDP by a tenth, while reducing operational costs by up to one fifth. Second, in the development of capital markets, size does matter - be it for greater efficiency from economies of scale, or for stability through diversity of players or for the market's ability to attract the attention of global investors and fund raisers. Individually, the capital markets in ASEAN are small.  The largest stock market in ASEAN, in Singapore, is less than 10% the size of Tokyo. The largest bond market in ASEAN, in Malaysia, is about 2% that of Japan's.  But combined, we have a size that is comparable to the markets in India and in China.

13   If the benefits of integration are clear, then why are ASEAN markets not more integrated today?  Some have cited the absence of a common currency as a reason. Others have pointed to the economies and markets as being at very different stages of development. Rather than look backward at what could have been or should have been done - I would look forward and argue that the absence of a common currency, and the diverse ASEAN economies, do not mean that ASEAN markets cannot be more inter-linked.  In fact, it is because the economies are different that we should accept the differences in exchange rates between ASEAN countries to cushion the impact of capital flows that a more integrated market may produce.  From an investor's point of view, the different currencies also provide an additional level of diversification of returns to a portfolio of ASEAN securities.

14   As you can tell from earlier presentations, ASEAN countries have already committed to forging closer links of our capital markets to facilitate cross-border activities. A few months ago, in a meeting in Vientiane, Laos, ASEAN Finance Ministers jointly indicated in a Ministerial statement, and I quote:  "To promote greater integration of our capital markets, we commit to develop an inter-linked ASEAN securities market by 2010".Unquote. I think that this is an important consensus. 

15   The efforts can be broadly grouped into three areas. The first, involves harmonizing of rules. Under the ASEAN Capital Markets Forum, ASEAN securities regulators have moved beyond merely improving their respective corporate governance and disclosure rules, but are also collaborating to harmonise standards on disclosure, distribution rules, accounting and professional qualifications.  The objective is to reduce the costs to issuers of complying with a multiplicity of regulations that their products are offered in. Once regulations are more harmonised, they will allow ASEAN securities regulators to increasingly recognise each other's regimes to facilitate cross-border distribution of securities and mutual fund products.

16   The second set of efforts revolves around improving market access.Ideally, an investor, say, in Malaysia should be able to buy a security listed in Singapore at the same price as an investor in Singapore.  Trading linkages can facilitate this.  Today, Bursa Malaysia and the Singapore Exchange are collaborating on a trading linkage, which is targeted to be completed sometime next year.  The trading link will deepen the pool of liquidity in both markets as well as offer greater product variety to investors in each country.  In tandem with this, ASEAN governments and exchanges have also set up a task force to explore various models of alliances and linkages among their exchanges.  An integrated equities market will be able to offer investors a number of single points of access to ASEAN securities.  In the same vein, an issuer from say, Europe can tap the collective ASEAN exchanges' liquidity by listing on any one of them.  Hopefully, the linkages will extend to the bond and derivative markets as well, and beyond trading to clearing and settlement. A pan-ASEAN clearing house and custodian, in the mould of Euroclear, can also bring our markets even closer together.

17   The third set of efforts involves common treatment.  This means liberalising capital account restrictions, which I should add, many ASEAN countries have progressively done so, especially with regards to inward capital flows. This will also necessitate having a tax regime that does not discriminate against offshore investment. You have heard how several ASEAN countries have already liberalised their tax regimes to make them more friendly to foreign investors, such as by exempting them from withholding taxes or giving tax incentives to Special Purpose Vehicles for Asset-Backed Securities.  Some ASEAN countries have also reformed their regulations to allow Multilateral Development Banks (MDB) to issue local currency bonds. So even though MDBs like the IFC and ADB can tap any market in the world, they have chosen to come to Malaysia, Philippines and Singapore to raise funds in Rinngit, Pesos and Singapore Dollars. Large US agencies like Fannie Mae and Sallie Mae have also chosen to tap the Singapore Dollar market to diversify their sources of funding.

18   Some of you will recognise that the three areas that I have mentioned - common rules, common access and common treatment are the same criteria that the ECB uses, to assess the level of market integration in Europe. This illustrates the lessons we can learn from Europe in our path towards greater market integration. But unlike Europe, many global investors and issuers see the ASEAN market opportunities as much more distinct ones.  Thus, apart from just working within ASEAN, ASEAN countries also need to promote the idea of a collective market internationally.

19   Several initiatives are being carried out on this front. In order to broaden offerings to international investors, five ASEAN stock exchange - Indonesia, Malaysia, Philippines, Thailand and Singapore - are collaborating to create an index of ASEAN stocks, which we hope will be launched in September at an investor conference in London that will involve the ASEAN Finance Ministers. Such a tradable index will comprise many top names that many of us in this room may already be familiar with, and will facilitate the creation of exchange-traded products such as funds and futures targeted at investors who recognise the economic and investment prospects of ASEAN.

20   The creation of such fund products dovetails neatly with the International Organisation of Securities Commissions' regional initiative on Mutual Recognition, that will allow such collective investment schemes that are domiciled and managed in a recognised jurisdiction to be distributed in another jurisdiction without having to seek separate approval for the same prospectus.  There is also some interest in taking this initiative forward on a bilateral basis between ASEAN countries, and in future, asset managers may find themselves being able to offer funds from one ASEAN location into other markets in the region.

21   In the bond market, you have heard about the central banks' Asian Bond Funds (ABF). ABF2's Pan-Asian Index Fund, which was listed just last week, will allow international investors interested in Asian local currency bonds to start with a high-proportion investment grade basket of sovereign and quasi-sovereign pool of assets. It is notable that, notwithstanding the larger domestic bond markets in Northeast Asia, ASEAN 5 bonds (which include Indonesia, Malaysia, Philippines, Singapore and Thailand) comprise over 50% of the ABF index. For bond investors with specific country interests, the ABF initiative also offers eight country sub-funds, including those of the ASEAN 5 countries.

22   As was mentioned earlier, the growth of derivative products will be an integral part of capital market development. As we grow our cash markets for equities and bonds, we should not neglect the mitigating role of a derivatives market. A well-developed derivatives market can help to complement and enhance the functioning of capital markets by deepening liquidity and facilitating the transfer of risk to those who are most willing to bear it.  Derivatives also make possible the structuring of more complex products.  Singapore's experience has confirmed this point. Our liberalisation of credit restrictions on Singapore dollar and of Singapore dollar derivatives in past years have helped to facilitate our capital market development.  For example, the growth of Singapore dollar interest rate swaps have contributed to the overall growth in our bond market.

23   Many ASEAN countries have also strengthened and are continuing to strengthen their legal systems. Some ASEAN markets have also seen the growth of more sophisticated products like Equity-Linked Notes, Credit-Linked Notes, Asset Backed Securitisation and Collateralised Debt Obligations. ASEAN regulators are also taking steps to streamline rules on derivatives. For example, Singapore is planning a single regulatory interface for corporations applying for authorisation as markets, clearing houses or licensing as futures brokers.

24   Allow me to now close with a reference to the European experience. Capital market integration is a journey and possibly, a long journey. It took more than a decade, and some would say several decades, for the emergence of the single European currency. In Europe, even now, some six years after the introduction of the Euro, much integration has been achieved but some divisions between markets still remain. In a similar way, the integration of ASEAN capital markets will be a journey. The reasons for embarking on the journey are clear, even if the final destination, and how soon we should get to it, will be subject to a process of collective learning and discovery. The journey will see many meaningful steps being taken, but a few steps at a time. As in any journey, there may be the occasions to step back in the face of an obstacle, or to pause and take stock of the progress made. But, having taken the first steps, we will press on - and each step will uncover new views and ideas that may affirm the course or set new directions and momentum. Even as ASEAN seeks to bring our markets closer together, we will also continue to pursue other initiatives to develop and deepen our individual markets.

25   You will be hearing a lot more about ASEAN market developments over the course of this conference and others.  As I mentioned earlier, the ASEAN Finance Ministers will be holding an investor seminar in London, in September this year. This roadshow will among other things, feature an ASEAN equities index developed by the five ASEAN exchanges.To find out more about this and other initiatives, I hope to see many of you in London then.

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