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ASEAN FINANCIAL INTEGRATION MONITORING REPORT 2017

ASEAN Integration Monitoring DirectorateThe ASEAN Secretariat

ContentsFigures...........................................................................................................................................2

Tables............................................................................................................................................2

Introduction...................................................................................................................................4

Chapter 1 – Economic and Financial Development..........................................................................6

I. Global and Regional Economic Development...........................................................................6

II. Financial Landscape in ASEAN.................................................................................................13

III. Conclusion................................................................................................................................19

Chapter 2. Progress in ASEAN Financial Integration under the AEC 2025.......................................21

I. Status of Implementation of Measures..................................................................................21

A. Financial Services Liberalisation.........................................................................................21

B. ASEAN Banking Integration Framework.............................................................................23

C. Capital Account Liberalisation............................................................................................23

D. Capital Market Development..............................................................................................24

E. Payment and Settlement System........................................................................................26

F. Financial Inclusion...............................................................................................................28

G. ASEAN Cooperation in Taxation..........................................................................................31

H. ASEAN Insurance Cooperation............................................................................................31

I. ASEAN Infrastructure Fund.................................................................................................32

II. Outcomes of Implementation of Measures............................................................................34

A. Status of KPIs Identification and Baseline Setting..............................................................34

B. Analysis of Selected KPIs.....................................................................................................39

i. Share of Intra-ASEAN Portfolio Investment to Total Portfolio Investment in ASEAN (WC-CAL)39

ii. Share of Intra-ASEAN FDI to Total FDI in ASEAN (WC-CAL)..................................................46

iii. Share of intra-ASEAN Portfolio Investment in Equity and Investment Fund to Total (WC-CMD)............................................................................................................................................48

iv. Share of Intra-ASEAN Portfolio Investment in Debt Securities to Total (WC-CMD)..............52

III. In Focus : Financial Integration, Trade and Investment in ASEAN..........................................56

IV. Conclusion...............................................................................................................................61

Conclusion and Way Forward.......................................................................................................63

References...................................................................................................................................67

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List of Figures and Tables

Figures Figure 1.1: Global Policy Uncertainty Index normalised over 2011-2015, 3 month moving average....7Figure 1.2: IMF Commodity Price Indices (2005=100)...........................................................................8Figure 1.3: ASEAN Annual GDP Growth (%)...........................................................................................9Figure 1.4: Ratio of global trade growth to global GDP growth...........................................................10Figure 1.5: ASEAN Total Trade.............................................................................................................10Figure 1.6: ASEAN Total FDI Inflows....................................................................................................11Figure 1.7: Lending Rates (%)..............................................................................................................16Figure 1.8: Domestic credit to private sector per GDP (%)..................................................................16Figure 1.9: Net Premium (in USD Billion).............................................................................................17Figure 1.10: Insurance Market Total Assets (In USD Billion)................................................................17Figure 1.11: Stock Market Capitalisation (in billion current USD)........................................................18Figure 1.12: Foreign Holdings of Local Currency Government Bonds (% of Total)...............................19Figure 2.1: Total Portfolio Investment in ASEAN.................................................................................40Figure 2.2: Share of Intra ASEAN Equity and Investment Fund and Debt Securities Investment.........40Figure 2.3: Share of intra ASEAN Portfolio Investment by Destination (%)..........................................43Figure 2.4: Share of ASEAN Investment from Total Portfolio Investment Received (%)......................44Figure 2.5: Share of Intra-ASEAN Investment by Origin (%).................................................................45Figure 2.6: Share of ASEAN Investment in Total Portfolio Investment Invested (%)............................45Figure 2.7: FDI Flows to ASEAN (USD mil)............................................................................................46Figure 2.8: Share of Intra-ASEAN FDI by Destination (%).....................................................................48Figure 2.9: Share of Intra-ASEAN FDI by Source Country (%)...............................................................48Figure 2.10: Portfolio Investment in Equity and Investment Fund in ASEAN.......................................49Figure 2.11: Intra-ASEAN Portfolio Investment in Equity and Investment Fund by Destination (%)....49Figure 2.12: Share of ASEAN Investment from Total Portfolio Investment in Equity and Investment Fund Received (%)...............................................................................................................................50Figure 2.13: Intra-ASEAN Portfolio Investment in Equity and Investment Fund by Origin (%)............51Figure 2.14: Share of ASEAN Investment from Total Portfolio Investment in Equity and Investment Fund Invested (%)................................................................................................................................52Figure 2.15: Portfolio Investment in Debt Securities in ASEAN............................................................53Figure 2.16: Intra ASEAN Portfolio Investment in Debt Securities by Destination (%).........................53Figure 2.17: Share of ASEAN Investment from Total Portfolio Investment in Debt Securities Received (%).......................................................................................................................................................54Figure 2.18: Intra ASEAN Portfolio Investment in Debt Securities by Origin (%)..................................55Figure 2.19: Share of ASEAN Investment from Total Portfolio Investmentin Debt Securities Invested (%)............................................................................................................55

TablesTable 1.1. GDP Growth (%)....................................................................................................................6Table 1.2: ASEAN Annual GDP Growth by Country (%)..........................................................................9Table 1.3: Flows of Portfolio Investment in AMS, 2015 (USD billion)..................................................12

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Table 1.4: ASEAN Financial Market Development Pillar of the World Competitiveness Index............14Table 1.5: Capital Adequacy and Non-Performing Loans.....................................................................15Table 1.6: Total Outstanding in Local Currency Bonds Market............................................................19Table 2.1: AMS Tax Treaty Networks...................................................................................................31Table 2.2: Projects Funded by the ASEAN Infrastructure Fund............................................................33Table 2.3: Potential Projects to be Funded in 2017.............................................................................33Table 2.4: Status of KPIs and Baseline.................................................................................................35Table 2.5: Intra-ASEAN Portfolio Investment Matrix (USD bil)............................................................43Table 2.6: Top Three Source of Portfolio Investment in ASEAN...........................................................44Table 2.7: Top Three Destination of Portfolio Investment by Country of Origin..................................46Table 2.8: Share of Intra-ASEAN FDI of Total FDI by AMS (%)..............................................................47Table 2.9: Top Three Source Countries by AMS in 2015......................................................................47Table 2.10: Top Three Source of in Equity and Investment Fund Investment in ASEAN......................50Table 2.11: Top Three Destination of Equity and Investment Fund Investment by.............................52Country of Origin in 2015....................................................................................................................53Table 2.12: Top Three Source of Debt Securities Investment in ASEAN in 2015..................................54Table 2.13: Top Three Destination of Equity and Investment Fund Investment by Country of Origin in 2015.....................................................................................................................................................56

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Introduction

In 2016, the inaugural year of the ASEAN Economic Community (AEC), efforts have been focused on putting in place the necessary implementation mechanisms and monitoring framework to ensure effective implementation of the AEC Blueprint 2025. In this regard, most sectoral bodies have finalised their respective sectoral work plans (SWPs), which were subsequently adopted by relevant ministerial bodies1 and endorsed by the AEC Council (AECC). The Strategic Action Plans (SAP) for ASEAN Financial Integration 2025 was endorsed in Vientiane, Lao PDR on 4 April 2016 by the ASEAN Finance Ministers and Central Bank Governor, and endorsed intersessionally by AEC Council.

The AEC 2025 Monitoring and Evaluation (M&E) Framework was likewise endorsed by the ASEAN Economic Ministers and the AECC in August and September 2016, respectively, and aims to support effective implementation of the AEC Blueprint 2025 and its corresponding SWPs. An important dimension of the AEC 2025 M&E Framework is outcomes monitoring, which approximates the achievement of regional economic integration strategic measures/objectives/goals, as stated in the AEC Blueprint 2025, and the corresponding sectoral work plans. A key tool for outcomes monitoring is key performance indicators (KPIs). The adoption of the Strategic Action Plan (SAP) for ASEAN Financial Integration 2025 led to the identification of sectoral KPIs for the finance track, a preliminary exercise of which was done in the ASEAN Financial Integration Monitoring Report (AFIMR) 2016, prior to the finalisation of the AEC 2025 M&E Framework and the SAP for ASEAN Financial Integration 2025.

The AFIMR 2017 provides the first opportunity to report on output and outcomes monitoring for financial integration in ASEAN under the new SWP and in line with the AEC 2025 M&E Framework. The AFIMR 2017 will be structured as follow. In the first chapter, the global economic and financial development will be discussed to provide a contextual background to the discussion on the progress in ASEAN Financial Integration. The second chapter will start by providing an update on the state of play of ASEAN financial integration, highlighting implementation milestones achieved in 2016, i.e. compliance monitoring. In addition, a preliminary baseline analysis of the KPIs, as identified in reference to the SAP for ASEAN Financial Integration 20252, will be presented as outcomes monitoring on the progress of the ASEAN financial integration agenda in 2016. In the second chapter, a thematic discussion will also be presented on the contribution of the ASEAN financial integration agenda in promoting growth in international trade and investment in the region.

1 The pending sectoral work plans are: the ASEAN Work Programme on E-Commerce, the Strategic Action Plan 2016-2025 for ASEAN Taxation Cooperation and the ASEAN Strategic Action Plan on Trade Facilitation.2 There are a number of KPIs that are yet to be finalized and adopted by the relevant Working Committees.

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Chapter 3 concludes the AFIMR 2017 by summarising the previous two chapters, especially highlighting the findings from the baseline analysis of the KPIs and the policy implications.

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Chapter 1 – Economic and Financial Development

I. Global and Regional Economic Development

1.1. Global growth in 2016 is estimated to stay modest at 3.1 percent 3 before accelerating to 3.4 percent in 2017. The advanced economies are expected to grow by 1.6 percent in 2016 before picking up to 1.9 percent in 2017, while in the emerging and developing countries, growth outlook is projected to remain solid at 4.1 percent and 4.5 percent in 2016 and 2017, respectively (Table 1.1). However, the outlook is highly contingent on the ramifications of the policy stance of the new U.S. administration as well as the impact of developments in the Eurozone including the outcomes of the UK’s referendum on the EU. Indeed, as shown in Figure 1.1, policy uncertainty has significantly increased from mid-2016.

1.2. Among the advanced economies, activity has picked up in the U.S. in the fourth quarter of 2016, bringing the economy closer to the Federal Reserve’s full employment and inflation objectives. However, U.S. economic outlook has also become more uncertain following the outcomes of the recent election. The early days of the new administration saw proposals for huge corporate and personal income tax cuts, increased infrastructure spending and major policy shifts with regard to trade and immigration, all of which are likely to have sizable effects on the U.S. economy and beyond. Growth projection for the U.S. has been revised upward by 0.1 percentage point to 2.3 percent in 2017. Despite the expectations of a stronger growth in the next few years compared with pre-election estimates, many however remain skeptical of the potential for a significant shift in the long-term growth trajectory.

Table 1.1. GDP Growth (%)2015 2016 2017

Global economy 3.2 3.1 3.4Advanced Economies 2.1 1.6 1.9

US 2.6 1.6 2.3EU 2.0 1.7 1.6UK 2.2 2.0 1.5Japan 1.2 0.9 0.8

Emerging Market and Developing Economies

4.1 4.1 4.5

China 6.9 6.7 6.5India 7.6 6.6 7.2Russia -3.7 -0.6 1.1

Source: International Monetary Fund World Economic Outlook (Update), Jan 2017

3 International Monetary Fund, World Economic Outlook UPDATE(January 2017)

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Figure 1.1: Global Policy Uncertainty Index normalised over 2011-2015, 3 month moving average

Source: PolicyUncertainty.com and OECD

1.3. In the Euro area, growth for the region has been revised upward to 1.6 percent, reflecting improved confidence following the aftershock of the outcomes of the UK’s referendum on the EU in June 2016. Conditions in the labour market continue to improve with employment recouping its pre- 2008 crisis level. In the credit market, borrowing costs have eased since the introduction of a negative interest rate policy in 2014 combined with the asset purchase programmes by the European Central Bank. But, concerns regarding the banking sector’s profitability, however, intensified in 2016. Policy uncertainty is also anticipated to heighten with major elections taking place in the Netherlands, France and Germany in 2017.

1.4. Japan’s economy is expected to register a growth of 0.8 percent in 2017 up from 0.7 percent in previous forecast but growth potential remained constrained by a shrinking and aging labour force and heightened policy uncertainty in its major trading partners. The economy is nevertheless expected to be boosted by the implementation of the fiscal stimulus package announced in August 2016.

1.5. The emerging markets and developing economies will be the main driver in the pick-up of global growth in 2017, supported by the anticipated increase in commodity prices notably oil (Figure 1.2). However, the outlook will be clouded by several factors such as the slowing down of global trade due among others to the slowdown in global value chain (GVC) trade and uncertainty regarding trade policies in the advanced economies. Another major downside risk is the weakening of potential output because of the deceleration in investment growth, which has reached below long-term average since mid 2014.

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Figure 1.2: IMF Commodity Price Indices (2005=100)

Source: International Monetary Fund, Primary Commodity Price System

1.6. In China, growth is expected to moderate further to 6.5 percent in 2017 from 6.7 percent in 2016, in line with the Chinese Government official target, as the country continues with the restructuring of its economic structure and the reforms of the state-owned-entreprises (SOEs). However, continued reliance on policy stimulus measures, with rapid expansion of credit and slow progress in addressing corporate debt, especially in the handling of budget constraints of the SOEs, will raise the risk of a sharper slowdown or a disruptive adjustment. Over the past decade, China’s total debt ballooned from 160 percent of GDP in 2005 to 258 percent of GDP in 2016, while corporate debt jumped from 105 percent of GDP to 169 percent over the same period. There were also concerns regarding its external position due to renewed capital outflows, which since 2015 up to early 2017 totaled more than USD 1.5 trillion, leading to faster than planned depreciation of the RMB against the USD.

1.7. In India, the growth forecast for 2017 has been revised downwards from 7.6 percent to 7.2 percent, reflecting negative consumption shock following the recent demonetisation initiative. Growth will however be supported by investment, which is set to recover, given the ongoing efforts to revive lending and reduce excessive leverage at large corporations.

1.8. In ASEAN, economic growth is projected to reach 4.6 percent4 in 2017, a 0.1 percentage point increase from the estimated growth of 4.5 percent in 2016 (Figure 1.3). As indicated in Table 2, growth varies from one country to another but is overall on a positive trend across the ASEAN Member States (AMS). Domestic demand will be the main driver for growth in 2017. The growth in private consumption is mainly driven by stable labour market conditions, relatively low inflation, continued wage growth and borrowing, while investment is supported by policy reforms, public spending and fiscal stimulus. With inflation at a relatively low level, compounded with easy global monetary conditions, some economies in the region had been able to ease monetary policy to support growth. Some have also been 4 Asian Development Bank, Asian Development Outlook Update (December 2016)

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able to use expansionary fiscal policy to support growth, despite the weakening of government revenue collection.

Figure 1.3: ASEAN Annual GDP Growth (%)

Source: For 2007-2015, ASEAN Statistics as of March 2017 For 2016 – 2017, ADB, ADO Update (Dec 2016)

Table 1.2: ASEAN Annual GDP Growth by Country (%)Country 2014 2015 2016 2017

Brunei (2.3) (0.6) 1.0 2.5Cambodia 7.0 7.1 7.0 7.1Indonesia 5.0 4.9 5.0 5.1Lao PDR 7.6 7.6 6.8 7.0Malaysia 6.0 5.0 4.1 4.4Myanmar 8.0 7.0 8.4 8.3Philippines 6.2 5.9 6.4 6.2Singapore 3.3 2.0 1.8 2.0Thailand 0.8 2.8 3.2 3.5Viet Nam 6.0 6.7 6.0 6.3ASEAN 4.6 4.7 4.5 4.6

Source: 2014-2015, ASEAN Statistics as of October, 2016. For 2016 – 2017, ADB, ADO Update (Dec 2016)

1.9. While ASEAN’s economic growth is projected to remain resilient in 2017, several downside risks remain. As ASEAN is tightly integrated into the global economy, it is expected to be adversely impacted by the continuous slowdown in global trade values as well as volume which has been observed since 2012. Indeed, in 2016, global trade growth is projected to be slightly above 1 percent, its lowest point since the 2008 global financial crisis and below the rate of GDP growth (Figure 1.4). The slowdown reflects the policy uncertainty that led firms to withhold their investments and production decisions, subdued demand from advanced economies, and continuous contraction in China and major commodity

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exporters. Trade in the region in 2016 is therefore expected to mirror the development at the global level thus continuing the trend observed in 2015 where it has declined by 10.3 percent (Figure 1.5). On the other hand, as global trade is anticipated to grow moderately in 2017 given the gains registered in all the trade-related indicators of the WTO’s latest World Trade Outlook Indicator (WTOI)5, some recovery is expected in the region’s trade growth as well.

Figure 1.4: Ratio of global trade growth to global GDP growth

Note: A ratio of below one indicates lower rate of GDP growth relative to global trade growth

Source: OECD Economic Outlook 100 Database

Figure 1.5: ASEAN Total Trade

Source: ASEAN Statistics as of March 2017

5 The WTOI is a leading indicator of world trade, designed to provide "real time" information on the trajectory of merchandise trade three to four months ahead of trade volume statistics. The WTOI combines several component indices of trade-related data into a single composite index namely an index of export orders, an index of air freight, an index of container throughput of major international ports, an automotive sector index, an index of electronic components trade and an index of trade in agricultural raw materials.

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1.10. Total foreign direct investment (FDI) inflows to ASEAN is also expected to further slow down after registering a 7.1 percent decline year-on-year in 2015 at USD 121 billion (Figure 1.6). Preliminary data shows that FDI flows to the ASEAN-6 economies during the 1 st

half of 2016 have decreased reflecting the moderation in economic growth in the major source countries. This trend is also in line with the decline in 2016 of 13 percent in global FDIs as well the relatively larger decline of 22 percent in developing Asia and Oceania as compared with other regions (UNCTAD, World Investment Report 2016).

1.11. The drop in FDI flows is part of the overall decline in the international capital flows to emerging economies since 2010. According to the IMF (2016)6, there is a marked decline in flows for all asset types namely FDI, portfolio equity, portfolio debt and “other investment,” the last one includes bank flows, due to both a decline in inflows and a rise in outflows. Examining the flows of funds for portfolio investment in the region (Table 1.3), most AMS except Indonesia and Lao DPR, are found to have experienced net outflows of portfolio investment in 2015 especially during the third quarter of the year. Though there were some reversals in net flows observed in countries such as Malaysia during the fourth quarter, it was relatively small to compensate the outflows occurring during the first three quarters. It is noteworthy that Indonesia continued to experience net inflows of portfolio investment amounting to more than USD16.41 billion although this is still lower than the flows in 2014 of more than USD 26 billion. In the case of Singapore, the net outflows of funds mostly reflected the acquisition of foreign assets by residents, which totaled more than USD 47 billion in 2015.

Figure 1.6: ASEAN Total FDI Inflows

Source: ASEAN Statistics as of March 2017

6 International Monetary Fund, Global Financial stability Report 2016

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Table 1.3: Flows of Portfolio Investment in AMS, 2015 (USD billion)

Country Year/Qtr Portfolio investment, assets

Portfolio investment, liabilities

Net Outflows/ Inflows

Brunei

2015 877.37 -877.37Q1 492.61 -492.61Q2 85.18 -85.18Q3 21.07 -21.07Q4 278.51 -278.51

Indonesia

2015 1268.43 17679.60 16411.16Q1 -24.32 8484.21 8508.53Q2 737.21 6286.67 5549.46Q3 682.99 -1519.04 -2202.03Q4 -127.45 4427.75 4555.20

Lao PDR

2015 10.50 541.77 531.27Q1 -0.07 -0.07Q2 360.09 360.09Q3 -0.43 -0.43Q4 10.50 182.19 171.69

Malaysia

2015 2747.28 -4960.74 -7708.02Q1 2033.94 -148.05 -2181.99Q2 2202.14 -1018.77 -3220.91Q3 -173.66 -6185.56 -6011.90Q4 -1315.14 2391.65 3706.78

Myanmar

2015 7.36 -0.10 -7.46Q1 9.28 -9.28Q2 -0.69 -0.10 0.58Q3 -1.16 1.16Q4 -0.08 0.08

Philippines

2015 3236.65 -2129.16 -5365.80Q1 858.15 1344.24 486.10Q2 1144.62 -2248.23 -3392.85Q3 971.16 -1479.24 -2450.40Q4 262.73 254.08 -8.65

Singapore

2015 47913.37 -6868.07 -54781.44Q1 11874.44 -1030.52 -12904.96Q2 5357.33 -2424.03 -7781.36Q3 12416.05 -1574.04 -13990.09Q4 17964.83 -1845.08 -19809.92

Thailand

2015 3817.23 -12690.91 -16508.14Q1 1816.19 -1608.87 -3425.05Q2 1564.62 -2857.19 -4421.82Q3 -979.44 -4118.96 -3139.52Q4 1415.86 -4105.89 -5521.74

Viet Nam

2015 -65.00 -65.00Q1 -53.00 -53.00Q2 160.00 160.00Q3 -79.00 -79.00Q4 -93.00 -93.00

Source: International Monetary Funds, Balance of Payment Statistics

1.12. The region is also subject to uncertainties surrounding the policy mix to be adopted by the new US administration. Indeed, following the US’s election result, the ASEAN-5 economies have experienced sharp outflows in both the bond and equity markets. Though

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the trends have reversed in January, more volatility is expected in the financial markets reflecting market’s unease over US policy uncertainties and the impact on capital flows and exchange rates.

1.13. The huge spillover impact of policy stances of the US on ASEAN and the world is due to its economic size as well as its close interlinkages with the global economy. The US is the biggest economy in the world, and one of the world’s largest importer and exporter of goods and services. It also accounts for 20 percent of global FDI stock, close to 20 percent of remittances, and 20 percent of global energy demand. According to the World Bank7, a one percentage point increase in U.S. growth could lift global growth by 0.7 percentage point. As for ASEAN, the US is its fifth largest trading partner with 9.35 percent of total trade and fourth largest source of FDIs with 11.29 percent of total flows in 2015. Therefore, mounting protectionist tendencies in the country, if translated into actual policies, could seriously undermine trade and investment potential and thus economic growth in the region. In addition, indirectly, ASEAN may also be affected in case of escalation of US-China trade risks through dampening growth and demand in the U.S. and China; in 2015, the two countries constituted more than 23 percent of total trade in the region.

1.14. On the other hand, the new US administration is anticipated to implement a more expansionary fiscal policy, leading to higher inflationary pressure and thus a less gradual tightening in monetary policy. Though higher growth in the US, as a result of the fiscal stimulus, could be a boon to an open economic region such as ASEAN, the positive impact may be counterbalanced by the adverse impact of abrupt tightening in the global financial conditions.

1.15. Another source of policy uncertainty surrounding the global economy is the outcome of the UK’s referendum on the EU. It will take some time to fully assess the impacts of Brexit on the economic prospects in Britain, the EU and the rest of the world including ASEAN. One major factor that will determine the impact is the type of the future relationship between the EU and the UK. In the case of ASEAN, economic exposure to the UK remains relatively limited with ASEAN trade with the UK accounting for only 1.29 percent of the region’s total trade in 2015 and FDI from the UK, 5.38 percent of total FDI inflows to ASEAN in the same period. Nevertheless, there will still be economic implications at a more micro level such as potential loss of access to the EU Single Market for ASEAN companies with subsidiaries in the UK. Of bigger concern, however, is the impact on the EU economy, which in 2015 is ASEAN’s fourth largest trade partner with 10.03 percent share and its largest external source of FDI with 16.66 percent.

II. Financial Landscape in ASEAN

1.16. The AMS are currently at different stages of development in their financial sectors given their different level of economic development. According to the recent World Competitiveness Index 2016 on financial development, ASEAN economies ranking ranges from as high as 2nd position to as low as 92nd position (Table 1.4). However, as pointed out by

7 The World Bank, Global Economic Prospect 2017

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the report, remarkable progress has been made by some AMS in terms of financial development, with Cambodia climbing up 21 spots in the ranking from 84 th position in 2015 to 63rd position in 2016, Lao PDR 20 spots and Vietnam 12 spots8. One area in which these economies have improved significantly is in the dimension of “Financial Services Meeting Business Needs” whereby Cambodia has improved from 92nd position to 74th while Vietnam has climbed to the 82nd position from 115th previously. Another category in which most AMS have made significant improvement is “affordability of financial services” which may reflect strong progress in these countries in terms of ensuring wider access to financial services among their population.

Table 1.4: ASEAN Financial Market Development Pillar of the World Competitiveness Index 2016 Financial

Market Development

Financial Services Meeting Business Needs

Affordabi-lity Of Financial Services

Financing Through Local Equity Market

Ease Of Access To Loans

Venture Capital Availability

Soundness of Banks

Regulation of Securities Exchanges

Legal Right 0 - 10 (Best)

Brunei Rank 92 87 55 120 86 61 91 73 86

Score 3.7 4 4 26 3.6 3 4.4 4.2 4

Cambodia Rank 63 74 79 132 76 66 92 117 4

Score 4.1 4.1 3.6 2.3 3.8 2.9 4.4 3.4 11

Indonesia Rank 42 34 36 29 26 20 72 60 68

Score 4.3 4.8 4.4 4.4 4.7 3.8 4.8 4.5 5

Lao Rank 81 71 49 91 70 63 84 104 46

Score 3.9 4.1 4.1 3.2 3.9 2.9 4.5 3.7 6

Malaysia Rank 13 15 17 22 25 6 44 30 28

Score 5 5.4 4.9 4.8 4.7 4.6 5.4 5.3 7

Philippines Rank 48 38 42 30 46 65 43 4 97

Score 4.2 4.7 4.3 4.4 4.3 2.9 5.5 5 3

Singapore Rank 2 4 2 7 3 3 8 1 20

Score 5.7 5.8 5.7 5.5 5.5 4.8 6.4 6.3 8

Thailand Rank 39 23 40 19 34 31 35 45 97

Score 4.4 5.1 4.3 4.9 4.5 3.5 5.6 4.8 3

Viet Nam Rank 78 82 61 56 83 43 117 102 28

Score 3.9 4.1 3.9 3.8 3.6 3.2 3.8 3.8 7

Source: World Economic Forum 2016

1.17. The region’s banking sector remains relatively stable and resilient with a solid capital base and adequate liquidity as reflected by the relatively high capital adequacy ratio in most of the AMS (Table 1.5). According to a study by the San Francisco Federal Reserve, the build-up of capital and liquidity buffers by the major banks9 in the region after the 1998

8 Brunei was not ranked in the 2014-2015 report while Myanmar was not featured in the 2015-2016 edition, therefore no comparison can be made for these two countries. 9 The study was conducted on a total of 75 major banks in 13 Asia Pacific economies which include 5 ASEAN economies namely Indonesia, Malaysia, Philippines, Singapore and Thailand.

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Asian Financial Crisis, have made them well positioned to meet the requirement of Basel III 10

.Table 1.5: Capital Adequacy and Non-Performing Loans

Regulatory Capital to Risk-

Weighted Assets

Regulatory Tier 1 Capital to

Risk-Weighted Assets

Non-performing

Loans Net of Provisions to

Capital

Non-performing

Loans to Total Gross Loans

Brunei2016Q2 20.85 22.54 4.21 3.73

2015Q2 20.81 21.42 3.90 3.21

Cambodia2016Q3 20.95 18.35 6.44 2.67

2015Q3 20.86 18.36 4.38 1.94

Indonesia2016Q3 20.64 20.62 6.12 3.03

2015Q3 20.21 18.58 6.82 2.62

Malaysia2016Q3 16.85 14.41 6.83 1.65

2015Q3 14.98 12.95 7.15 1.62

Philippines2016Q3 15.28 12.84 3.56 1.94

2015Q3 16.09 13.60 3.02 2.14

Singapore2016Q3 16.86 14.70 7.09 1.19

2015Q3 15.78 13.61 5.09 0.85

Thailand2016Q3 18.20 14.84 8.68 3.05

2015Q3 16.99 13.82 8.38 2.91

Viet Nam2015Q4 12.77 10.14 11.02 2.34

2014Q4 11.83 10.58 14.17 2.94

Source: International Monetary Fund, Financial Soundness Indicators

1.18. There are some concerns with regards to the increase in the Non-Performing Loans (NPL) in some of the region’s economies as indicated by Table 1.5 due to the rapid growth in credit. Indeed, the low interest rates environment beginning from 2012 (Figure 1.7) has led to sustained credit growth and substantial build-up in private sector debt and leverage in several economies in the region. In some ASEAN economies, this reflects partly household borrowing that supported private consumption and investment in properties while in others, this was the result of rapid growth in credit to sectors such as real estate and construction. Consequently, the stock of credit to the private sector, as a percentage of GDP has increased consistently during the past few years (Figure 1.8), and may pose a risk to financial stability as monetary conditions in the developed economies start to tighten. On the other hand, it is noteworthy that there has been a deceleration in the growth of credit to the private sector observed across the AMS.

10 Under Basel III, the minimum capital ratios (including capital conservation buffer) will be effectively raised to 6.0%, 7.0%, and 10.5% for Tier 1, Tier 1 Common Equity (CET1) and Total Capital, respectively. These requirements began phasing in on January 1, 2013, with full implementation by January 1, 2019

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Figure 1.7: Lending Rates (%)

Source: World Bank, World Development Indicators

Figure 1.8: Domestic credit to private sector per GDP (%)

Brunei

Cambodia

Indonesia

Myanmar

Malaysia

Philippines

Singapore

Thailand

Viet Nam

0

20

40

60

80

100

120

140

160

2010 2011 2012 2013 2014 2015

Source: World Bank, World Development Indicators

1.19. The ASEAN insurance markets continued to grow in 2015 despite the global economic uncertainties. The total premium volume grew by more than eight percent to reach USD 87.92 billion (Figure 1.9). The improved performance was underpinned by robust recovery and sustained strong expansion in some AMS as well as good development in Takaful businesses. The region is expected to sustain robust premium growth this year and the next.

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1.20. Despite a slight decline of 2.50 percent year-on-year in 2015, total assets of the ASEAN insurance sector were still robust at USD 388.13 billion (Figure 1.10). Life insurance continued to hold a bigger share of USD 322.02 billion, or approximately 83 percent of total assets, while the non-life sector accounted for another USD 66.10 billion. Singapore held the highest share of regional insurance total assets in 2015, followed by Thailand and Malaysia.

Figure 1.9: Net Premium (in USD Billion)

Source: ASEAN Secretariat

Figure 1.10: Insurance Market Total Assets (In USD Billion)


1.21. On the other hand, the region’s capital market was seriously impacted by the subdued global economic growth in 2015 due among others to the slowdown in China coupled with the uncertainty regarding the US monetary policy with the stock market in the region, particularly Singapore and Malaysia, reaching its lowest level since 2011. The market

A F I M R 2 0 1 7 17

capitalisation in Singapore in 2015 stood at USD 639.96 billion compared to USD 765.08 billion in 2012, while in Malaysia, the market capitalisation in 2015 was USD 382.98 billion compared to USD 500.39 billion in 2012. The market, however, has started to recover in 2016 with Indonesia, Thailand and Vietnam registering more than 20 percent growth (Figure 1.11).

Figure 1.11: Stock Market Capitalisation (in billion current USD)

Source: World Federation of Exchanges

1.22. The region’s local currency (LCY) bond markets continued to increase in size and depth, particularly in Thailand and Vietnam, thus providing an increasingly efficient alternative avenue for fund raising for both the private and government sectors. In 2016, LCY bonds outstanding reached over USD1 trillion, more than double its size 10 years ago (Table 1.6). Thailand had the biggest bond market with bonds outstanding of USD 302.95 billion, followed closely by Malaysia with USD 260.20 billion. The corporate bond market is the biggest in Malaysia with total outstanding of USD 118.97 billion followed by Singapore with USD 91 billion. As for the government bonds, Thailand had the largest LCY bonds outstanding with USD 221.50 billion, and Malaysia came second with USD 141.23 billion. However, despite the growth in the LCY bond markets, the regional bond market, particularly the corporate bond, is significantly smaller as compared to more developed markets.

1.23. Foreign investors remained substantial holders of government bonds, especially in Malaysia and Indonesia, given their relatively attractive yield amid a low global interest rate environment and the positive economic prospects of the region (Figure 1.12). At the end of 2016, foreigners held more than 37.55 percent and 32.16 percent of government bonds in Indonesia and in Malaysia respectively.

A F I M R 2 0 1 7 18

Table 1.6: Total Outstanding in Local Currency Bonds MarketIndonesia Malaysia Philippines Singapore Thailand Viet Nam

Dec-05

Govt USD bil 48.27 61.34 41.13 46.9 64.93 2.68Corporate USD bil 5.88 45.63 1.00 36.2 14.06 0.01Total USD bil 54.15 106.97 42.13 83.1 78.99 2.69% of GDP 19.18 74.38 39.39 65.17 42.56 5.10

Dec-10


Dec-16


Source: AsianBondsOnline

Figure 1.12: Foreign Holdings of Local Currency Government Bonds (% of Total)

Jun-10Oct-

10

Feb-11Jun-11

Oct-11

Feb-12Jun-12

Oct-12

Feb-13Jun-13

Oct-13

Feb-14Jun-14

Oct-14

Feb-15Jun-15

Oct-15

Feb-16Jun-16

05

1015202530354045

Indonesia Malaysia Thailand

Source: AsianBondsOnline

III. Conclusion

A F I M R 2 0 1 7 19

1.24. After a modest growth recorded in 2016, the world economy is expected to pick up in 2017 supported by solid growth in the emerging economies and stronger pace of recovery in the advanced economies. However, several downside risks remain particularly pertaining to the policy uncertainties arising from the outcomes of the US presidential election in November 2016.

1.25. In ASEAN, growth remained robust in 2016 and is expected to accelerate in 2017 with an upward trend observed across all AMS. Similar to the global outlook, the region’s economy is subject to the political uncertainties in the advanced economies as well as the anticipated tightening of the global monetary condition. But given its strong macroeconomic fundamentals ASEAN’s economy is expected to remain resilient. On the other hand, as evidenced by the experiences of the EU whereby financial integration has taken a retreat in time of great uncertainties, there is also a risk that ASEAN financial integration agenda may take back seat as countries implement measures in facing these challenges.

1.26. The financial landscape in the region is also found to remain robust across all the sector reflecting the strong fundamentals of the AMS. However, there were some concerns with regard to the rise in private credit growth due to the low interest rate environment.

1.27. Financial development remains uneven across the AMS which may impact the progress of further financial integration in the region as some countries may not be able to fully participate in the financial integration agenda and benefit from it. On the other hand, significant progress has been made over the years by the less developed economies. And with the continuous progress made in the pursuit of ASEAN financial integration agenda, more progress is expected to be achieved notably through the implementation of measures as guided by the Strategic Action Plan (SAP) for ASEAN Financial Integration 2025. The following chapter will provide a review of the implementation of these measures in 2016.

A F I M R 2 0 1 7 20

Chapter 2. Progress in ASEAN Financial Integration under the AEC 2025

2.1. The Chapter will be divided into three sections. The first section will provide an update on the status of the implementation of measures and policies under ASEAN’s overall financial integration agenda in 2016. This will cover the areas of financial services liberalisation, capital account liberalisation, capital market development, payment and settlement system, financial inclusion as well as the ASEAN finance cooperation initiatives (e.g. insurance and taxation) and ASEAN Infrastructure Fund.

2.2. In reviewing the implementation of measures, reference will be made to the list of annual priorities presented by the relevant working committees to the Special Committee of the Whole (CoW) held on 21 Jan 2016 in Vientiane, Lao PDR. This will then be complemented by a review of the activities listed as Quantifiable Targets in the SAP.

2.3. The second section will examine the outcomes of the implementation of measures and policies under ASEAN’s overall financial integration agenda using the set of outcomes-level KPIs, as identified in reference to the SAP for ASEAN Financial Integration 2025. In this 2017 report, the focus will be on setting the baseline of these KPIs as benchmarks to monitor outcomes in the period covered in the SAP. Moving forward, the exercise is aimed towards highlighting the outcomes in the financial integration agenda beyond implementation of measures and policies. An analysis will also be provided on a selected number of the KPIs that have been endorsed.

2.4. Finally, a third in-focus section will provide a preliminary analysis on the contribution of financial integration on trade and investment.

I. Status of Implementation of Measures

A. Financial Services Liberalisation

2.5. The main objective of Financial Services Liberalisation (FSL) within ASEAN is to gradually remove restrictions for ASEAN financial institutions to deliver financial services in other AMS. Towards that end, the following measures have been identified as its priorities in 2016, as presented at the Special CoW held on 21 Jan 2016 in Vientiane, Lao PDR.

a. The completion of ratification of the Protocol to Implement the Sixth Package of the Financial Services Commitments (6th Protocol);

b. The completion of the enhanced financial services obligations through the Chapter on Financial Services of the ASEAN Trade in Services Agreement (ATISA); and

A F I M R 2 0 1 7 21

c. The establishment of the ASEAN Insurance Forum (AIFo) as a platform for cooperation between the WC-FSL and ASEAN Insurance Regulators Meeting (AIRM) to integrate the ASEAN insurance sector.

2.6. For the first priority on the completion of ratification of the 6th Protocol, nine AMS have completed their ratification processes and Indonesia is currently in the final stages of its ratification process.

2.7. On second priority on the completion of the enhanced financial services obligations through the Chapter on Financial Services of the ASEAN Trade in Services Agreement (ATISA), negotiations on the Financial Services obligations are still ongoing. The remaining articles are:

a. Definitions (Financial Institution, New Financial Service)b. New Financial Servicec. Self-regulatory Organisations

2.8. Finally, the third priority on the establishment of the ASEAN Insurance Forum (AIFo) the Terms of Reference (TOR) of the establishment of AIFo was endorsed by the 2nd AFMGM and AIFo has held its inaugural meeting on 24 November 2016 in Jogjakarta, Indonesia and 2nd Meeting in Singapore, March 2017.

2.9. In addition to the priorities above, the SAP has also listed several targets to be achieved in 2016-2017 period as follows:-

a. Substantial liberalisation in remaining areas, i.e., areas not pledged for substantial liberalisation by 2015.

This is targeted to be achieved within the next 10 years. However, substantial liberalisation of natural catastrophe reinsurance is targeted to be included under the 8th Package of ASEAN Framework Agreement on Services (AFAS) in 2018 and 9th Package of AFAS in 2020.

b. The signing, ratification and entry into force of the Protocol to Implement the Seventh Package of the Financial Services Commitments (7th Protocol), which also covers substantial liberalisation of cross-border Marine, Aviation and Transit (MAT) insurance.

The 7th Package was signed on 23 June 2016, and to date five AMS, namely Brunei Darussalam, Lao PDR, Singapore, Thailand and Viet Nam have completed ratification.

c. Full liberalisation of cross- border Marine, Aviation and goods in international Transit (MAT) insurance by April 2016.

All AMS have fully liberalised cross-border MAT insurance except for Indonesia and Myanmar.

d. Organisation by the AMS of a campaign to raise public awareness (for insurance).

A F I M R 2 0 1 7 22

This target is yet to be achieved as the WC-FSL lacks the necessary expertise on financial inclusion. The WC-FSL has sought the consideration of the ASEAN Senior Level Committee on Financial Integration (SLC) consideration to refer this policy action to the WC-FINC for implementation and its stands ready to provide the relevant support, where necessary.

e. Publication of List of Safeguard Measures on Financial Services of each AMS. The list is expected to be published together with the 8th Package of

AFAS in 2018.

f. Collaborate with AIMD or other institution to conduct the study of relationship between liberalisation and financial stability, including recommendations to improve financial stability.

The WC-FSL is in the process of consulting with relevant institutions such as the IMF, ADB and AMRO on past research that has been conducted in this area.

B. ASEAN Banking Integration Framework

2.10. In addition to the WC-FSL, financial services liberalisation initiatives in ASEAN is also guided by the works of the Working Committee for the ASEAN Banking Integration Framework (WC-ABIF). Three activities have been identified as the targets for 2016-2017 by WC-ABIF, one under the financial integration pillar and two under the financial stability pillar as follows:

a. Guidelines for monitoring and reporting on progress of agreements under ABIF;

b. Regulatory landscape scan; and c. Private sector consultation on cross-border regulatory issues.

2.11. All these three activities are still pending. The formal guidelines will be drafted within 2017 although informal updates have been provided by WC-ABIF members with respect to ongoing bilateral discussions. As for the regulatory landscape scan, a task force under WC-ABIF will lead the assessments and review the findings will be discussed in order to identify appropriate actions to be recommended. Finally, the private sector consultation on cross-border regulatory issues will be undertaken on a periodic basis by WC-ABIF members. The discussion will be reported to the WC and recommendations may be provided.

C. Capital Account Liberalisation

2.12. The Working Committee on Capital Account Liberalisation (WC-CAL) has identified one priority measure for implementation in 2016 namely the finalisation of enhanced Capital Account Liberalisation (CAL) Heatmap Methodology

2.13. The WC-CAL has agreed to enhance the CAL Heatmap Methodology to provide a more objective assessment of the AMS’ capital account regimes, and all AMS have filled on a

A F I M R 2 0 1 7 23

trial basis the enhanced CAL Heatmap. The AMS have provided their inputs and comments, which have been incorporated by the WC-CAL into the CAL Heatmap.

2.14. The WC-CAL has also identified for targets in the SAP for 2016-2017 as follows:-a. Consolidation of CAL policy dialogue reports of AMS from 2014-2015.

The works on consolidating the CAL Policy Dialogue report is still ongoing.

b. Development of reporting template on safeguard mechanisms to be incorporated into CAL policy dialogue mechanism.

The responses from the first round of Survey on Safeguard Measures have been collected from WC-CAL members.

c. Development of secured CAL policy dialogue database The development of a secured CAL policy dialogue database

composed of a master list of all implemented initiatives and policies culled from the country reports for the policy dialogue process, and is expected to be completed and launched by the second half of 2017.

d. Launch of secured CAL policy dialogue database This activity is expected to be completed by second half of 2017

D. Capital Market Development

2.15. Under the capital market development agenda, there are three measures has been reported as priority measures in 2016 which was were based on the ASEAN Capital Market Forum (ACMF) Annual Implementation Plan 2016 (Annual Plan 2016)11.

a. Implement an effective and efficient post-trade framework, including on the relevant rules and practices

b. Prioritise and implement capacity building programmes through the ACMF Market Development Programme (A-MDP)

c. Review the ASEAN Corporate Governance (CG) Scorecard and develop an integrated system for CG assessment

2.16. With regards to the first priority, preliminary study on this (phase 1) has been completed, and the follow up (phase 2) is ongoing.

2.17. As for the second priority, at the 24th ACMF Meeting on 25 March 2016, the ACMF endorsed the TOR of the ACMF Market Development Programme (A-MDP) Working Group as a common platform to coordinate capacity building programmes for ASEAN capital markets. The ACMF has collaborated with the Asian Development Bank (ADB) in conducting needs analysis to guide the development of tailored capacity building programmes for members individually and collectively. 11 The Annual Plan 2016 sets out ACMF’s immediate priorities for the year, during its 24th meeting hosted by the Securities and Exchange Commission, Thailand on 25 March 2016. The Annual Plan 2016 was later endorsed by the ASEAN Finance Ministers and Central Bank Governors in April 2016. The Annual Plan 2016 was developed based on the earlier approved ACMF Action Plan 2016-2020 (Action Plan) and will drive the ACMF's objective of achieving an inter-connected, inclusive and resilient ASEAN capital market, to help realise the ASEAN Economic Community Vision 2025 of deepening economic integration over the next ten years.

A F I M R 2 0 1 7 24

2.18. The ACMF launched the ASEAN Young Regulators Programme as the first programme to be rolled out under the A-MDP with the secondment of young regulators from SEC Cambodia to the Securities Commission Malaysia. This new programme aims to foster mutual sharing and exchange of expertise and experiences among capital market regulators in securities regulators through secondment opportunities at ASEAN capital market regulators.

2.19. The ACMF has also endorsed the Capacity Building Plan developed jointly by the ACMF and the ADB on 9 September 2016. As a start, a regulatory programme on developing domestic bond markets tailored specifically for members from Cambodia, Lao PDR, Myanmar and Vietnam (CLMV members), was rolled out in September 2016 and hosted by the Securities and Exchange Commission (SEC) Cambodia.

2.20. Finally, under the third priority, the ACMF continue its efforts in improving the quality of ASEAN companies through its corporate governance work. In 2016, the ACMF has reviewed the ASEAN Corporate Governance Scorecard and its methodology, developed an integrated assessment system to strengthen the evaluation process, as well as position the overall corporate governance initiative to attain recognition by international corporate governance experts.

2.21. In addition to these priorities measures, the Working Committee on Capital Market Development (WC-CMD) has also identified eleven targets for 2016-2017 that corresponds to seven policy actions. Seven of the targets have been completed as follows:-

a. At least three AMS are engaged in the trading link. Three countries are currently engaged in the trading link namely

Malaysia, Thailand and Singaporeb. At least six AMS make available benchmarks at regular intervals (list of

benchmark tenors) The benchmarks are now available in seven countries namely Brunei,

Indonesia, Malaysia, Philippines, Singapore, Thailand and Viet Nam.c. At least two AMS make available post-trade (or end-of-day) bond prices

The post-trade (or end-of-day) bond prices are made available by Four AMS namely Indonesia, Malaysia, Philippines, Singapore and Thailand.

d. At least four AMS adopt ASEAN Disclosure Standards for Debt Securities Three AMS namely Thailand, Malaysia and Singapore have also

adopted the ASEAN Disclosure Standards for Debt Securities.e. At least three AMS have suitably wide range of securities eligible for central

bank liquidity. The securities are currently available in six countries namely

Cambodia, Malaysia, Myanmar, Singapore, Thailand and Vietnam.f. At least two AMS have granted retail investors access to purchase

government bonds

A F I M R 2 0 1 7 25

Five countries Indonesia, Malaysia, Philippines Singapore and Thailand have provided retail access to purchase government bonds.

g. Subject matter expert sharing on international experience in denominating corporate bonds in smaller lots sizes.

The activity has been conducted in September 2016 by the Thai Bond Dealers Association.

2.22. On the other hand another four targets are yet to be achieved and are at different stages of implementation.

a. Subject matter expert sharing on adopting recommended contractual clauses in project documents and loan documents.

b. At least one sharing session or roundtable in the upcoming Committee Meetings/joint session of the WC-CMD and ACMF.

c. Provide clarity on issues raised by industry, including taxation and foreign exchange measures.

d. AMS to share experience on risk mitigation mechanisms or tools.

2.23. For 2016, in addition to initiate efforts to implement the CMD Strategic Action Plan for 2016-2025, the WC-CMD also plans to: (i) continue efforts to enhance capital market development through facilitating the implementation of the ASEAN Collective Investment Schemes (CIS) Framework as well as by continuing to share on topics of interest on bond market development and facilitating retail access to bond markets, and have subject matter expert sharing on infrastructure financing; (ii) continue to monitor members’ bond market development progress via regular updates to the refined scorecard; and (iii) continue coordination with SCCB on capacity building.

2.24. The WC-CMD has also recognised potential benefits of Green Bonds for ASEAN and has agreed to embed green bond topic in WC-CMD 2017-2018 work plan. The WC-CMD has also agreed to have a Green Bond Initiative Joint session/coordination with ACMF. In this regard, a study on “Recommendations for Public Sector to Promote Green Bonds in ASEAN” has recently been conducted by Thailand.

2.25. The WC-CMD will also continue to explore common topics of interest for its annual joint session with the ASEAN Capital Markets Forum (ACMF). In this regards, the delineation of roles between the ACMF and WC-CMD has been agreed. The WC-CMD will focus on developing sovereign bond markets and address cross-cutting issues such as tax and foreign exchange issues with the appropriate forums. The ACMF will instead focus on areas such as the primary and secondary equity and corporate bond markets, improving regional market infrastructure and connectivity, and dispute resolution and enforcement issues.

E. Payment and Settlement System

2.26. In the case of Payment and Settlement System (PSS), no annual priorities for 2016 have been identified and presented to the CoW. However, several measures and targets were identified for implementation in the SAP for 2016-2017, namely:-

A F I M R 2 0 1 7 26

a. Determine the feasibility of interlinkages and interoperability of Large Value Payment System (LVPS) and Retail Payment System (RPS) among AMS;

b. Implementation of domestic RPS that facilitates near realtime transfer of funds;

c. Lower the cost of remittance;d. Implementation of policies to promote consumer protection as well as fair

competition among card schemes;e. Compliance to international standard; andf. Lower fraud levels in comparison to other regional blocks.

2.27. For the first target in the SAP, two sub-activities have been identified: first the conduct of a more comprehensive survey on LVPS and RPS covering legal, operational, security aspects and business needs and second to explore available technology options to facilitate LVPS interlinkages and interoperability.

2.28. A comprehensive survey on LVPS was conducted in December 2016. The result of the LVPS survey indicates that Real Time Gross Settlement (RTGS) linkages are technically possible, there were some challenges and feasibility studies should be conducted to determine the business case for such linkages. More precisely, the survey found that:-

a. Almost all of AMS have developed, owned, and operated RTGS, except Cambodia, with the RTGS in three AMS namely Indonesia, Malaysia and Thailand having cross-border linkage.

b. Almost all ASEAN RTGS systems recognise the demand for inter-linkage of RTGS with regard to the cross-border trade settlement

c. Most RTGS do not have separate cut-off time for large value and low value payment

d. Currently, ISO 20022 is adopted by RTGS of Autoriti Monetari Brunei Darussalam, while other Central Banks in the region plan to adopt this standard with different timeline.

e. Almost all Central Banks in the region provide intraday liquidity on collateralised basis however different legal provision is adopted on different issues.

f. The Central Banks acknowledge the necessity to publish a common guideline/ agreement for all connected RTGS systems

2.29. On exploring the available technology options to facilitate LVPS interlinkages and interoperability, a technology provider, CMA, has presented to the WC-PSS its concept on interlinkages of LVPS. On 9 Feb 2017, the Asian Clearing Unit (ACU) has presented to WC-PSS its concept of regional settlement, while ADB presented the principles of Central Securities Depository (CSD)-RTGS Linkages as a Regional Settlement Intermediary for Government Bonds.

2.30. With regards to the second target on the implementation of domestic RPS, 6 AMS namely Malaysia, Singapore, Cambodia, Indonesia, Thailand, and Vietnam have implemented near real time domestic transfer of fund and other AMS plan to implement it

A F I M R 2 0 1 7 27

in different timeline. The policy framework on promoting remittances through formal channels will be based on the World Bank Policy Framework. The survey study on remittance services and regulations will be conducted to gather existing situation and future trend in member countries, and identify gaps against the World Bank Policy Framework.

2.31. To promote consumer protection and achieve low fraud levels compared to other regional blocks, the WCPSS will undertake a study to ascertain the level of fraud in the region, starting with payments related to card transactions. This will be followed by recommendations to reduce fraud risks, if it is significantly higher than other regional blocks.

2.32. In preparation to comply with the Principles for Financial Market Infrastructure (PFMI)

a. Some countries have conducted a self-assessment/ undergone the Financial Sector Assessment Program (FSAP) based on the PFMI; and

b. Most countries plan to conduct the self-assessment based on PFMI by 2025

F. Financial Inclusion

2.33. Similar to PSS, no annual priorities have been identified by the Working Committee on Financial Inclusion (WC-FINC) during the Special CoW in Jan 2016. However, based on the SAP, several activities are targeted for completion for 2016-2017.

2.34. The WC-FINC has established 4 Desired Outcomes (DO) to achieve the 2025 financial inclusion targets namely (i) Reduction of average financial exclusion level for ASEAN region from 44% to 30% and (ii) Enhanced readiness of financial inclusion infrastructure from 70% to 85%12.

2.35. Under desired outcome 1 (DO1) “Formulate financial inclusion strategy and implementation plan”, several targets have been concluded in 2016 and 2017. During the first quarter of 2016, the WC-FINC has endorsed the ASEAN Financial Inclusion Framework, TOR of the WC-FINC as well as Guiding Principles for WC-FINC. The latter comprises eight principles which are aligned with the G20 Principles for Innovative Financial Inclusion and contextualised to ASEAN.

2.36. The WC-FINC also agreed on the common features that could be considered by ASEAN member countries in developing a national definition of financial inclusion, based on global best practices. The four common features are (1) targeted population, (2) coverage or scope of services, (3) features of inclusive system, and (4) end-goals. Based on these features, financial inclusion can be summarised as “a state in which all segments of society have equal opportunity to have access to and usage of quality, convenient and affordable 12 Readiness of financial inclusion infrastructure defined as availability of the following 8 areas in ASEAN member countries: (i) Public credit registry; (ii) Credit guarantee institution; (iii) Specific institution to support financial inclusion mandate, e.g. DFIs and MFIs; (iv) Debt resolution mechanism/avenue for advisory and redress; (v) National financial inclusion strategy/ blueprint; (vi) Law to support financial inclusion; (vii) Regulations and platforms for digital financial services; and (viii) Financial inclusion monitoring framework.

A F I M R 2 0 1 7 28

financial services towards greater shared prosperity.” The proposed definition or vision is also aligned with those adopted by several ASEAN countries.

2.37. Works are progressing well on the implementation of other activities under DO1:a. WC-FINC has completed the monitoring report of national strategies on

financial inclusion. 7 countries in ASEAN have formulated national financial inclusion strategies/ blueprint and 6 countries established monitoring framework. 8 capacity building programmes have been conducted in 2016 to help countries develop or enhance their national strategies. The Guidance Notes on National Financial Inclusion Strategy (NFIS) is also being developed as reference for countries. The Guidance Notes will cover the process of developing NFIS and showcase key features and lessons learnt from development of NFIS of selected ASEAN countries. The draft Guidance Notes has been completed and will be finalised and published in Q3 2017, after obtaining inputs from ASEAN member countries.

b. DO1 focuses on the measurement of financial inclusion level in ASEAN. It has been agreed for the financial inclusion level in ASEAN to be measured by the ownership of any account (e.g. savings, current/ transactional, financing, e-money, mobile money) at financial institutions. FINDEX or national data would be used for this measurement, whichever agreed at the national level. Based on the latest WC-FINC survey conducted in 2016, the average financial exclusion level for ASEAN is 44%. In reducing data disparity between Global FINDEX and national surveys, WC-FINC is collaborating with World Bank in developing a customised and more regular FINDEX survey for ASEAN (every 18 months). In addition, World Bank is also assisting WC-FINC to develop a comprehensive survey template and methodology for reference and possible adoption by ASEAN member countries.

2.39 The second DO (DO2) is to elevate capacity building of AMS to enhance financial inclusion ecosystem. The sub-committee (SC) for DO2 also aims to identify the main areas which require capacity building assistance and match the requests with relatively more advanced AMS and international partners such as Alliance for Financial Inclusion (AFI), the World Bank, United Nations Capital Development Fund (UNCDF) and Organisation for Economic Co-Operation and Development (OECD).

2.40 The DO2 has completed the study on infrastructure readiness and facilitated technical assistance to enhance financial inclusion ecosystem:

a. Based on the survey conducted by WC-FINC in 2016, the average level of infrastructure readiness in ASEAN is 70 percent, and the target set for 2025 is 85 percent. Therefore, several areas of assistance have been identified mainly in (1) developing financial inclusion strategy and enhancing data collection for robust monitoring, (2) financial inclusion institutions and MSME financing, (3) enhancing digital framework for better outreach and (4) financial education and consumer protection.

b. Coordination is also ongoing to match technical assistance requested by AMS with relevant international partners. Based on a survey conducted by WC-

A F I M R 2 0 1 7 29

FINC in Q2 2016, eight AMS have requested technical assistance in various areas of financial inclusion. WC-FINC has facilitated the coordination and matching between requesting countries with relevant international partners during the sidelines of the Mekong Financial Inclusion Forum in July 2016. As a result, five AMS have established their financial inclusion infrastructure roadmap. Several bilateral ASEAN study visits also took place in 2016. The ASEAN Financial Inclusion Forum will also be organized by WC-FINC on 24-28 April 2017 in Kuala Lumpur, Malaysia in order to address the remaining technical assistance requests of all AMS.

2.41 The SC for DO2 is also preparing a directory of events on the relevant capacity building programmes in financial inclusion, which comprises international seminars and conferences, technical assistances, peer-to-peer learning programmes and joint learning programmes. WC-FINC is also expected to establish an ASEAN knowledge repository in Q2 2017.

2.42 The third DO (DO3) of financial inclusion is to promote innovative financial inclusion via digital platforms. In order to achieve this, there are three activities that will be spearheaded by the SC for DO3. The first is to carry out a regional digital financial services (DFS) stock taking exercise to evaluate the current status of existing technical capabilities and regulations that support the implementation of digital financial services. Towards this end, the stocktaking study framework has been completed in collaboration with the World Bank whilst the survey itself will be undertaken in Q2 2017. The assessment on the survey outcomes will be completed by Q3 2017, followed by the publication of the stocktaking report end of this year.

2.43 The SC for DO3 will also develop the Guidance Notes on DFS to support financial inclusion, which will address the common challenges faced by ASEAN member countries and recommend priorities to accelerate financial inclusion in the region. The Guidance Notes will be completed by Q1 2018, following findings from the stocktaking report.

2.44 The third target under the purview of the SC for DO3 is the implementation and monitoring of recommendations from the Guidance Notes on DFS, targeted to commence in Q2 2018 onwards.

2.45 To date, five capacity building programmes on digital financial services have been completed. Seven AMS have issued regulations and have a platform on DFS, and six have adopted sandbox approach to support fintech initiatives.

2.46 Finally, the fourth DO (DO4) of Financial Inclusion is to develop strategies, policies and initiatives that will increase awareness on financial education/ literacy and consumer protection. The DO4 has established the ASEAN Financial Education & Consumer Protection Framework in November 2016 and ASEAN financial education website (www.aseanwcfinc.com) in January 2017.

2.47 The SC for DO4 will coordinate implementation of national financial education strategies and implementation of regional and national financial education awareness

A F I M R 2 0 1 7 30

campaigns via; (1) ASEAN Savings Campaign in October 2017; and (2) Financial education campaigns which will be continuously carried out throughout the year. The SC for DO4 will also develop the Guidance Notes on Financial Education and Consumer Protection, which will be completed by Q4 2017.

G. ASEAN Cooperation in Taxation

2.38. In continuing with their commitments under the AEC Blueprint 2025 towards the completion of the network of bilateral agreements on the avoidance of double taxation, the Working Group on the ASEAN Forum on Taxation (Wg-AFT) has identified three priorities for 2016.

2.39. The first is the conclusion of Cambodia’s negotiation for its first bilateral tax agreement and for other AMS to continue establishing their agreements with other AMS. While Cambodia is the only ASEAN Member that is still in the process of negotiating and concluding its first bilateral agreement, it has been engaged in several Double Taxation Avoidance Agreement (DTA) negotiations with other AMS; 1 round with Brunei, Indonesia, and Malaysia; 2 rounds with Vietnam and 3 rounds with Thailand. The DTA negotiations between Cambodia-Brunei, Cambodia-Malaysia, and Cambodia-Indonesia are expected to be concluded before the ASEAN Finance Ministers Meeting in 2017 while the Cambodia-Singapore DTA is on ratification process.

2.40. The matrix below summarises the latest status of the bilateral agreements among the AMS. As can be seen, all AMS except Cambodia have signed and ratified at least one bilateral agreement with another AMS. Singapore is now awaiting for the ratification of its agreement with Cambodia to be the first AMS to have an agreement with all AMS.

Table 2.1: AMS Tax Treaty Networks Brunei Cambodia Indonesia Lao

PDRMalaysia Myanma

rPhilippines Singapore Thailan

dViet Nam

Brunei *2 √ √ √ *1 *2 √ *1 √Cambodia *2 *2 *1 *2 *1 *1 *3 *2 *2Indonesia √ *2 √ √ *2 √ √ √ √Lao PDR √ *1 √ √ √ *1 *3 √ √Malaysia √ *2 √ √ √ √ √ √ √Myanmar *1 *1 *2 √ √ *2 √ √ √Philippines *2 *1 √ *1 √ *2 √ √ √Singapore √ *3 √ √ √ √ √ √ √Thailand *1 *2 √ √ √ √ √ √ √Viet Nam √ *2 √ √ √ √ √ √ √

Notes: 1. Proposal, 2.Negotiation process, 3.Ratification processSource: WG-AFT

2.41. The second priority is the assessment of the impact of AMS’ current bilateral tax agreements. However, this activity can only be implemented once all AMS have had their bilateral agreements.

A F I M R 2 0 1 7 31

H. ASEAN Insurance Cooperation 2.42. Progress has been made in the area of ASEAN Disaster Risk Financing and Insurance (DRFI) through the development of enabling policies and institutional environments. As part of the efforts to promote multilateral cooperation towards the adoption of a regional agreement on DRFI, the ASEAN Finance Ministers endorsed the establishment of the ASEAN Cross-Sectoral Coordination Committee (ACSCC) on DRFI in 2013. The ACSCC is a cross-sectoral committee consists of three bodies, namely ASEAN Finance and Central Bank Deputies Meeting (AFCDM), AIRM and ASEAN Committee on Disaster Management (ACDM), which work on the DRFI initiative. The establishment of the ACSCC is an initiative following the ASEAN Agreement on Disaster Management and Emergency Response (AADMER), which is a regional framework for cooperation, coordination, technical assistance, and resource mobilisation in all aspects of disaster management. The AADMER aims to achieve substantial reduction of disaster losses in lives and in the social, economic, and environmental assets, and to jointly respond to disaster emergencies through concerted national efforts and intensified regional and international cooperation.

2.43. For its initial year, the DRFI was undertaken as a capacity-building initiative that covers three strategic components: (1) risk information, assessment, and modelling; (2) public policy development; and (3) knowledge management. The proposal for the Phase 2 of ASEAN DRFI Programme has been submitted by the DRFI Team to the ACSCC members for their feedback and review.

2.44. Under component I, the expected outputs include the establishment of a national database system on disaster damage and loss, leading towards the development of a regional disaster risk information management system. In this regard, the ASEAN Disaster Impacts Database Workshop was held on 28 February to 2 March 2017 in Bangkok, Thailand. As for component II, a baseline study on policies and legislation on DRFI is currently conducted in Philippines and Thailand which would result in documentation of policy development processes and good practices in the region. Finally, under component III, the capacity and training needs assessment (CTNA) is ongoing. The CTNA will serve as a basis to develop a training module on DRFI for ASEAN in collaboration with Swiss Re and GIZ.

I. ASEAN Infrastructure Fund

2.45. The ASEAN Infrastructure Fund (AIF) was established in 201213 to foster infrastructure development and to strengthen regional physical connectivity within the region that will support the establishment of the AEC and beyond, including implementation of the Master Plan of ASEAN Connectivity. The Fund aims to promote the use of regional savings in financing infrastructure development which may lead to an eventual issuance of bonds which are eligible for investment as central bank reserves. The AIF aims to finance up to USD 300 million worth of projects yearly to support the development of infrastructure in

13 The AIF Shareholder Agreement was signed in 2011 and was formally registered in Labuan in 2012.

A F I M R 2 0 1 7 32

the region on a sustainable basis. The original equity contribution stands at USD 485.3 million, of which USD 335.3 million is equity contribution from all AMS and the remaining USD 150 million is contributed by the Asian Development Bank (ADB).

2.46. To date, seven projects with a combined total value of USD 320 million are supported by the Fund (Table 2.2). Several projects are also in the pipeline for 2017 (Table 2.3). Given that the projects slated for 2017 will require approximately USD 295 to 320 million in funding from the AIF, this will bring the total approved AIF portfolio to around USD 600 million, thus, exceeding the equity contributions of the AMS.

Table 2.2: Projects Funded by the ASEAN Infrastructure Fund

Country Sector ProjectApprova

l Date

Total Project Costs

(USD mil)

AIF Funding

(USD mil)

ADB Funding

(USD mil)

Indonesia Energy Java–Bali 500kV Power Transmission Crossing Project

3 Dec 2013

249 25 224

Indonesia Water Metropolitan Sanitation Management Investment Project

31 Mar 2014

120 40 80

Viet Nam Energy Ha Noi and Ho Chi Minh City Power Grid Development Sector Project

23 Sept 2014

273 100 173

Indonesia Energy Sustainable and Inclusive Energy Program

Sept 2015

500 100 400

Myanmar Transport/ICT

Greater Mekong Subregion East–West Economic Corridor Eindu to Kawkareik Road Improvement Project

10 Nov 2015

120 20 100

Lao PDR Urban/Water

Second GMS Corridor Towns Development Project

13 Nov 2015

47 10 37

Indonesia Energy Electricity Grid Strengthening – Sumatra Program

2 Dec 2015

600.0 25 575

TOTAL 1909 320 1 1,589Source: ASEAN Infrastructure Fund

Table 2.3: Potential Projects to be Funded in 2017 (as of January 2017 project pipeline)

Country Sector Project

AIF Funding

(USD mil)

Remarks

Indonesia Others Improved Food Security and 100 Potential approval in

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Irrigation Management Phase 1 the 1st Q., 2017Indonesia Energy Sustainable and Inclusive

Energy Program, Phase II 100 Potential approval in

2017Indonesia Energy Sustainable Energy Access in

Eastern Indonesia–Power Generation

25-50 New Project

Lao PDR Urban/ Water Second Water Supply and Sanitation Sector Project

10 Potential approval in 2017 (to be confirmed)

Lao PDR Urban/ Water Fourth GMS Corridor Towns Development

10 New Project

Philippines Transport/ ICT Improving National Roads for Inclusive Growth in Mindanao Project

50 Potential approval in the 1st Q., 2017

Total 295-320

Source: ASEAN Infrastructure Fund

2.47. The Fund is working on the indicative prospects for its credit rating, in preparation for the Fund’s bond issuance by 2018 in order to mobilise funds from the region for its lending operations. Specifically, the analysis of the AIF’s bond issuance preparation, being a key components its financial administration, has been undertaken. Based on this progress, the Administrator has engaged a credit rating agency to discuss the AIF’s rating prospects.

II. Outcomes of Implementation of Measures

2.48. An important dimension of the AEC 2025 M&E Framework is outcomes monitoring which approximate the achievement of regional economic integration strategic measures/ objectives/goals as stated in the AEC Blueprint 2025. Towards this end, all sectoral bodies are required to develop measurable outcomes-level KPIs to accompany the respective sectoral work plans as the key tool for outcomes monitoring.

2.49. In this section, we will first provide an update on the status of the KPI identification process by all the Working Committees in reference to the SAP for ASEAN Financial Integration 2025. The baseline for all the indicators that has been adopted by the relevant Working Committees will also be determined. In the second sub-section, further analysis will be provided on a number of the KPIs in order to identify the challenges that may impact on the potential growth of AMS. Given the availability of data, the analysis will only be conducted for the KPIs identified by the WC-CAL, namely (i) share of intra-ASEAN portfolio investment to total portfolio investment in ASEAN and (ii) share of Intra-ASEAN FDI to Total FDI; and the KPIs identified by the WC-CMD, namely (i) share of Intra-ASEAN Portfolio Investment in Equity and Investment Fund shares to Total and (ii) share of Intra-ASEAN Portfolio Investment in Debt Securities to Total.

A. Status of KPIs Identification and Baseline Setting

2.50. Table 2.4 below summarises the current status on sectoral KPIs with regard to the identification of outcomes-level KPIs by the various working committees/groups under the financial integration track. As of 31 March 2017, the working committees/groups that have

A F I M R 2 0 1 7 34

finalised and adopted their KPIs are WC-ABIF, WC-CAL, WC-CMD/ACMF, WC-FINC and AFT-WG. In the case of the AFT-WG, however, one of the three KPIs is still under consideration of the WG. It is also important to note that the KPIs for WC-FINC only pertain to the financial integration pillar and financial inclusion pillar. The KPIs for the financial stability are yet to be finalised. As can be seen in Table 2.4, the WC-ABIF and WC-FINC have set in their KPIs the targets to be achieved and the corresponding timeframe. As for the other adopted KPIs, no targets have been alluded to.

Table 2.4: Status of KPIs and Baseline (as of 31 March 2017)Working

Committee/Group

KPIs (and targets where available)

Status Baseline Source

WC-FSL Financial Integrationi. Penetration rate

ii. Ratio of reinsurance premiums ceded in ASEAN (each country) to total ceded reinsurance premium (each country)

iii. Natural catastrophe protection gap: natural catastrophe insurance coverage (or sum insured), in proportion to potential loss exposure arising from an identified natural catastrophe

Work in progress

To be determined after adoption


WC-ABIF Financial Integrationi. By 2019, two (2) established

Qualified ASEAN Banks (QABs)

ii. By 2019, two (2) concluded ABIF agreements

Adopted i. Noneii. One

WC-ABIF

Financial Stability i. Number of jurisdictions with

Crisis Management, Resolution, and Recovery (CMRR) Framework already in place

ii. Number of home-host supervisory agreements

Agreed To be determined after adoption

WC-ABIF

A F I M R 2 0 1 7 35

contingent upon cross-border banking presence

iii. Number of areas identified to promote transparencyand coherence

WC-CAL Financial Integrationi. Share of intra-ASEAN

portfolio investment to total portfolio investment in ASEAN

ii. Share of Intra-ASEAN FDI to Total FDI in ASEAN

Adoptedi. 13.29

percent (2015)

ii. 18.38 percent (2015)

i. IMF, CPIS

ii. ASEC

Financial Stability i. Safeguard Measures for

ASEAN: AMS’s readiness indealing with volatile capital flows: 1) data availabilityand 2) policy toolkit

Under discussion



WC-CDM/ACMF

Financial Integrationi. Share of Intra-ASEAN

Portfolio Investment in Equity and Investment Fund shares to Total

ii. Share of Intra-ASEAN Portfolio Investment in DebtSecurities to Total

Adopted i. 10.66 percent (2015)

ii. 16.93 percent (2015)

IMF, CPIS

WC-PSS Financial Integrationi. Adoption rate of ISO20022 in

ASEAN ii. Number of bilateral or

multilateral linkages on Large Value Payment System( LVPS) and Retail Payment System (RPS) established as a better proxy indicator for financial integration(dependent on country readiness and business case)

Under discussion



A F I M R 2 0 1 7 36

iii. Values/volumes of transactions from the bilateral or multilateral linkages on LVPS and RPS (if linkage isimplemented)

Financial Inclusioni. Fee level for domestic retail

payments and cross-border remittance

Under discussion



Financial Stabilityi. Self-assessment based on

International Organization of Securities Commissions -The Committee on Payments and Market Infrastructures (IOSCO-CPMI) Principles for Financial Market Infrastructures (PFMI

Under discussion



WC-FINC Financial Inclusioni. Reduction of average

financial exclusion level for ASEAN region from 44 percent to 30 percent by 2025

ii. Enhanced readiness of financial inclusion infrastructure for ASEAN region from 70 percent to 85 percent by 2025

Adopted i. 44 percent (2016)

ii. 70 percent (2016)

WC-FINC

AFT-WG Financial Integrationi. Number of AMS that have

Double Taxation Avoidance Agreement (DTAs) with all other AMS

ii. Number of new DTAs with other AMS that were signed and ratified in/or after 2015

iii. Number of existing DTAs

Adopted the first two

The third is for further considera

i. None

ii. 2 DTAs

iii. To be determined after adoption

AFT-WG

A F I M R 2 0 1 7 37

with other AMS which were renegotiated and which were signed and ratified in or after 2015, and for which withholding tax rates were improved

tion and discussion of AFT-WG

2.51. The Table also provides the baselines for the KPIs which have been adopted to benchmark the progress in these areas in the coming years. The year 2015 which marked the launch of the new AEC 2025 Blueprint will be used as the baseline year except for the KPIs for WC-FINC for which 2016 is used as the baseline year. In total, there are 10 KPIs for which baselines have been identified.

2.52. For WC-ABIF, the two KPIs are:a. By 2019, two (2) established QABs

No QAB has been established yet; andb. By 2019, two (2) concluded ABIF agreements

One. On 1 August 2016, Malaysia and Indonesia have signed a Bilateral Agreement which outlines the areas that would be implemented between Malaysia and Indonesia under ABIF.

2.53. For WC-CAL, the two KPIs for financial integration pillar are:a. Share of intra-ASEAN portfolio investment to total portfolio investment in

ASEAN 13.29 percent; and

b. Share of Intra-ASEAN FDI to Total 18.38 percent.

2.54. For WC-CMD and CMF, the two KPIs for financial integration pillar are:a. Share of Intra-ASEAN Portfolio Investment in Equity and Investment Fund to

Total 10.66 percent; and

b. Share of Intra-ASEAN Portfolio Investment in Debt Securities to Total 16.93 percent.

2.55. For WC-FINC, the baseline was already identified in the KPIs based on the stock-take on the level of financial inclusion that was conducted in 2016. Therefore, in contrast to other working committees, the baseline for WC-FINC will be 2016 instead. The KPIs also include the following specific targets to be achieved:

a. Reduction of average financial exclusion level for ASEAN region from 44 percent to 30 percent by 2025. The 2016 average financial exclusion level

A F I M R 2 0 1 7 38

in ASEAN was revised from 53 percent to 44 percent based on the latest survey conducted by WC-FINC in March 2016; and

b. Enhanced readiness of financial inclusion infrastructure for ASEAN region from 70 percent to 85 percent by 2025.

2.56. Finally, for AFT-WG the baselines for the two KPIs is as follows:a. Number of AMS that have DTAs with all other AMS

None. However three AMS have only one DTA left to be ratified. Singapore are in the process of ratifying its DTA with Cambodia. While Malaysia and Vietnam have started negotiations with Cambodia; and

b. Number of new DTAs with other AMS that were signed and ratified in/or after 2015

Two DTAs have been signed and ratified after 2015:1. DTA between Indonesia and Lao PDR which was ratified in

2016; and 2. DTA between Singapore and Lao PDR which was ratified in

November 2016.

B. Analysis of Selected KPIs

i. Share of Intra-ASEAN Portfolio Investment to Total Portfolio Investment in ASEAN (WC-CAL )

2.57. The share of intra-ASEAN portfolio investment to total portfolio investment in ASEAN stood at 13.29 percent in 2015, an increase from 11.68 percent in 2014 (Figure 2.1). However, the amount of intra-ASEAN portfolio investment decreased by around two percent from USD 89.61 billion in 2014 to USD 88.075 billion in 2015. The increase in the share of intra-ASEAN portfolio investment is due to a larger decrease of 15 percent of extra-ASEAN portfolio investment from USD 677.66 billion in 2014 to USD 574.80 billion in 2015. As a result, the share of extra-ASEAN portfolio investment has decreased from 88.32 percent in 2014 to 86.71 percent in 2015.

2.58. Investment in debt securities accounted for 55.03 percent of intra ASEAN portfolio investment in 2015 while the rest are investment in equity and investment fund (Figure 2.2). As can be seen, there has been an increase in the share of debt securities Investment over the years despite the drop in 2013. A more significant increase is observed in extra-ASEAN debt securities investment. This may reflect the strong growth in the regional bond market as explained in Chapter 1.

A F I M R 2 0 1 7 39

Figure 2.1: Total Portfolio Investment in ASEAN

Source: International Monetary Fund, Coordinated Portfolio Investment Survey (CPIS)

Figure 2.2: Share of Intra ASEAN Equity and Investment Fund and Debt Securities Investment


2.59. In total, portfolio investment in ASEAN in 2015 stood at USD 662.87 billion or 1.43 percent of total global portfolio investment. The drop in portfolio investment in ASEAN in 2015, though occurring in the backdrop of a general decrease in global portfolio

A F I M R 2 0 1 7 40

investment, was relatively large at 13.61 percent year-on-year compared to only 5.57 percent for the latter. Zeroing further on the equity and investment fund investment, while globally there was a drop of 2.94 percent, the decline experienced by the ASEAN region was relatively higher at 13.41 percent. As for debt securities investment, the decline in ASEAN investment was higher at more than 15 percent compared to a drop of 7.78 percent globally over the same period. This may be explained by the fact that foreign investors hold a larger share of LCY bonds in the market compared to their holdings of equity.

2.60. Since 2010, the drop in the portfolio investment has been happening at the back of a moderation in the global capital flows especially to the emerging economies. The IMF Global Financial Stability Report in 2016 shows that from 2010 to the third quarter of 2015, the overall size of the drop in capital flows to the emerging economies amounted to a total of USD 1.123 trillion or 4.9 percent of these economies’ GDP. The report points to the diminished prospects for growth in emerging markets relative to advanced economies as the main reason behind the slowdown in total capital flows. Another factor that may explain the trend is the expectation of the monetary tightening in the advanced economies, which has been attracting back the capital to the advanced economies.

2.61. Nevertheless, in the case of ASEAN, the region continued to experience sustained increase in capital flows until 2014, as indicated by the continued increase in foreign portfolio investment in the region (Figure 2.1). This may reflect the attractiveness of the region due to its strong fundamentals and strong growth potential relative to other emerging economies.

2.62. However, in 2015, ASEAN seems to be catching-up with the rest of the world given the larger drop in portfolio investment in the region relative to the one occurring at the global level. Since there is no significant change in terms of the region’s economic fundamentals in 2015 as compared to previous years, it can be assumed that the drop in the capital flows was a reflection of the growing importance of global push factors as a determinant of international capital flows (Box Article 2.1).

Box 2.1: What Determines International Capital Flows?

An extensive empirical literature has sought to understand the determinants of international capital flows,given the serious implications on the real economy of several episodes of huge capital flow fluctuations experienced by the global economy particularly the emerging market. This body of literature which tends to focus more on the emerging economies have distinguished between the pull factors of capital flows and the push factors.

The pull factors pertain to the economic, social and political environment or commonly known as the fundamentals of the recipient economy. Studies have shown that among the variables that are found to be positively and significantly correlated with capital flows are:

Interest rate or prospective return on domestic investment; Level of financial development; Prudent fiscal and monetary policies; Exchange rate regime;

A F I M R 2 0 1 7 41

Capital account openness; Institutional quality such as sound regulations, protection of property rights, law

enforcement; Trade openness; Income level or economic growth; and Productivity level.

On the other hand, push factors relate to the economic environment such as interest rate or economic growth in the originating countries which alter affect the relative attractiveness of the recipient countries. However, more recently studies (e.g. Milesi-Ferretti and Tille (2011), Rey (2013) and Cerutti et al. (2015)) have demonstrated the importance of common global push factors driving capital flows especially to the emerging economies such as:

the role of US monetary policy; the supply of global liquidity (especially in US dollars); and global risk aversion.

Another strand of literature, however, points to fact that while these global push factors drive capital flows to the emerging markets, the macroeconomic fundamentals of these economies (the pull factors) will determine the magnitude of the flows. It is these fundamentals (pull factors), according to the studies, that explain why some economies are more or less affected when there is a sudden outflows of capital due to changing global environment (push factors).

From the policy implication perspectives, it is important to distinguish between the push and pull factors. If international capital flows are mainly influenced by global factors, then the recipient economies may still be subject to global shocks despite their strong fundamentals. In contrast, if domestic fundamental remain the driving force of capital flows, policymakers will be better position in influencing them.

References:1. Agénor, P.R. (1998). The Surge in Capital Flows: Analysis of Pull and Push Factors . International

Journal of Finance and Economics, vol. 3, pp. 39.57.2. Cerutti et al. (2015). Push Factors and Capital Flows to Emerging Markets: Why Knowing Your

Lender Matters More Than Fundamentals. IMF Working Papers, WP/15/1273. Milesi Ferretti, G-M & C. Tille. (2011). ‐ The Great Retrenchment: International Capital Flows

during the Global Financial Crisis. Economic Policy, vol. 26(66), pp. 285-342. 4. Rey, H. (2013). Dilemma not Trilemma: The Global Financial Cycle and Monetary Policy

Independence. Federal Reserve Bank of Kansas City Proceedings.

2.63. In terms of country of destination, more than 97 percent intra-ASEAN portfolio investment in 2015 went to the ASEAN-5 (Figure 2.3); Singapore (27.50 percent), Indonesia (25.95 percent) Malaysia (25.72 percent) Thailand (9.97 percent) and the Philippines (8.14 percent). This is due to the relatively higher level of financial development in these five countries especially in terms of available products and services. Among these five countries, it is interesting to note a significant decrease in the share of intra-ASEAN portfolio investment in Indonesia from almost 37 percent in 2010 to less than 26 percent in 2015, in contrast to Singapore which saw a jump from 17.54 percent in 2010 to almost 28 percent in 2015.

2.64. However, in absolute value, we notice an increase in the amount of investment received by the CLMV countries reflecting the increasing attractiveness of these economies

A F I M R 2 0 1 7 42

as an investment destination. For example, in the case of Cambodia, intra-ASEAN portfolio investment in the country has increased from USD 3.18 million in 2010 to more than USD 8 million in 2015. Similarly, in Viet Nam, the intra-ASEAN portfolio investment grew significantly during the same period from USD 371.16 million to more than USD 1 billion.

Figure 2.3: Share of intra ASEAN Portfolio Investment by Destination (%)


Table 2.5: Intra-ASEAN Portfolio Investment Matrix (USD bil)

Investment in

Investment fromTotal

Indonesia Malaysia Philippines Singapore Thailand ASEAN

Brunei 19 19 56

Cambodia 7 1 8 532

Indonesia 2,648 2,173 17,918 119 22,857 135,534

Lao 1,048 1,048 1,102

Malaysia 17 157 21,839 642 22,654 118,083

Myanmar 68 68 100

Philippines 7 293 6,797 73 7,170 62,669

Singapore 210 22,573 34 1,405 24,222 252,123

Thailand 24 842 135 7,769 8,770 83,786

Viet Nam 9 13 1,186 51 1,259 8,890

ASEAN 267 26,395 2,499 55,576 3,339 88,076 662,874Total 13,090 69,132 10,677 961,638 42,024 1,096,561 46,225,757


2.65. Figure 2.4 illustrates the extent to which intra-ASEAN portfolio investment is important for the AMS. While on average, intra-ASEAN portfolio investment constitutes only 13.29 percent of total portfolio investment received, the share can be as high as 95.11

A F I M R 2 0 1 7 43

percent for Lao PDR and 67.86 percent for Myanmar in 2015. In the case of Myanmar, intra-ASEAN portfolio investment even constituted 100 percent of total investment in 2010, 2011 and 2014. Other countries with above average rates in 2015 are Brunei (33.89 percent), Indonesia (16.87 percent) Malaysia (19.18 percent) and Vietnam (14.16 percent).

2.66. On the other hand, relative to other source countries, ASEAN remains as the major source of portfolio investment. Table 2.6 shows that in 2015 for all AMS, ASEAN is in the top three largest source of portfolio investment except for Cambodia where ASEAN is the fourth largest source.

Figure 2.4: Share of ASEAN Investment from Total Portfolio Investment Received (%)


Table 2.6: Top Three Source of Portfolio Investment in ASEAN in 2015No. 1 No. 2 No. 3

Country Share of total (%) Country Share of

total (%) Country Share of total (%)

Brunei France 66.43 ASEAN 33.89 N/ACambodia Luxembourg 87.12 Netherland 4.33 Norway 3.76Indonesia USA 35.04 ASEAN 16.86 Luxembourg 14.24Lao PDR ASEAN 95.11 Luxembourg 0.85 UK 0.22Malaysia USA 27.75 ASEAN 19.18 Luxembourg 8.87Myanmar ASEAN 68.00 India 31.00 Norway 2.00Philippines USA 36.64 ASEAN 11.44 Luxembourg 10.22

Singapore USA 39.45 ASEAN 9.61 UK 9.55Thailand USA 35.97 Luxembourg 11.76 ASEAN 10.47Viet Nam USA 30.47 UK 14.58 ASEAN 14.16


2.67. All of the intra-ASEAN portfolio investment originated from five AMS namely Indonesia, Malaysia, the Philippines, Singapore and Thailand. Malaysia and Singapore constitute more than 93 percent of the total originating intra-ASEAN portfolio investments (Figure 2.5). Total portfolio investment from Malaysia has increased steadily over the years

A F I M R 2 0 1 7 44

from 18.27 percent of total intra-ASEAN investment in 2010 to almost 30 percent in 2015, while those from Singapore has decreased from 77.39 percent to 63.10 percent during the same period. It is also noteworthy that investment from Thailand has reached almost four percent in 2015, more than double the amount in 2014.

Figure 2.5: Share of Intra-ASEAN Investment by Origin (%)

2010 2011 2012 2013 2014 20150%

10%20%30%40%50%60%70%80%90%

100%

Indonesia Malaysia Philippines Singapore Thailand


2.68. Figure 2.6 shows that for Malaysia, and to a lesser extent the Philippines, intra-ASEAN investment constitutes a significant amount of their external portfolio investment. In the case of Malaysia, intra-ASEAN investment’s share of total international investment has increased steadily from 31.37 percent in 2010 to reach almost 40 percent in 2015, while for the Philippines, its share has increased from around 15 percent in 2010 to more than 22 percent in 2015. Table 2.7 further illustrates the importance of ASEAN as a destination for Malaysia’s and the Philippines’ international portfolio investment. As can be seen, ASEAN is the first and second destination for Malaysia and the Philippines’s international portfolio investment.

2.69. As for the other three AMS, the share of intra-ASEAN portfolio investment of their total international investments are relatively low at 3.69 percent for Indonesia, 6.21 percent for Singapore and 3.8 percent for Thailand. Nevertheless, ASEAN remains an important destination for these three economies’ international portfolio investment, with ASEAN being 4th in Singapore, 5th in Thailand and 6th in Indonesia.

Figure 2.6: Share of ASEAN Investment in Total Portfolio Investment Invested (%)

A F I M R 2 0 1 7 45


Table 2.7: Top Three Destination of Portfolio Investment by Country of OriginNo. 1 No. 2 No. 3



Indonesia Netherland 28.04 China 9.82 US 4.50Malaysia ASEAN 38.18 US 30.11 HK 5.94Philippines US 44.51 ASEAN 23.41 China 6.15Singapore US 27.82 China 10.52 India 6.52Thailand China 17.17 US 14.44 Luxembourg 12.37


ii. Share of Intra-ASEAN FDI to Total FDI in ASEAN (WC-CAL )

2.70. FDI flows to ASEAN in 2015 stood at almost USD 121 billion, with intra-ASEAN flows constituting the largest source of FDI to the region at USD 22.21 billion or 18.38 percent of the total FDI flows ahead of EU-28 (USD 20.12 billion) and Japan (USD 17.56 billion). While extra-ASEAN FDI flow has decreased by more than eight percent, intra-ASEAN flows remain relatively stable during the same period.

Figure 2.7: FDI Flows to ASEAN (USD mil)

A F I M R 2 0 1 7 46


2.71. Table 2.8 shows that the share of intra-ASEAN FDI flows in ASEAN total FDI flows varied widely across the AMS in 2015, ranging from almost 79 percent in Myanmar to 1.16 percent in the Philippines. Indonesia and Brunei Darussalam are another two countries for which intra-ASEAN FDI flows constituted a significant portion of their total FDI flows at 56.15 percent and 50.58 percent, respectively in 2015. It is interesting to note that intra-ASEAN flows to Myanmar has increased significantly from only 1.13 percent of total investment in 2010 to almost 80 percent in 2015. In contrast, Lao PDR has seen a significant decrease in the share of intra-ASEAN FDI. Table 2.9 indicates that for four AMS namely Brunei Darussalam, Indonesia, Malaysia and Myanmar, ASEAN is the first source of FDIs flow in 2015. While for Cambodia, Lao PDR, Thailand and Vietnam, ASEAN is the second largest source of FDI flows.

Table 2.8: Share of Intra-ASEAN FDI of Total FDI by AMS (%) 2010 2011 2012 2013 2014 2015Brunei 14.31 5.58 3.64 -7.99 24.85 50.58Cambodia 44.60 25.10 33.59 23.44 21.57 25.01Indonesia 42.88 43.31 39.65 47.28 59.99 56.15Lao PDR 40.71 16.07 0.00 0.00 15.10 20.56Malaysia 5.74 22.20 29.94 17.79 21.00 24.08Myanmar 1.13 4.11 11.17 45.28 72.25 78.98Philippines 3.10 -4.08 5.19 -1.08 2.36 1.16Singapore 9.99 3.45 20.05 7.55 7.01 5.57Thailand 15.06 38.49 -5.78 3.31 -39.43 17.61Viet Nam 16.26 20.18 15.09 23.35 16.82 18.25ASEAN 15.05 17.47 20.33 15.56 17.10 18.38


Table 2.9: Top Three Source of FDI flows by AMS in 2015 No. 1 No. 2 No. 3

Country % of total Country % of total Country % of total

A F I M R 2 0 1 7 47

Brunei ASEAN 50.58 EU-28 48.91 Cayman Isl 7.88Cambodia China 31.61 ASEAN 25.01 EU-28 10.59Indonesia ASEAN 56.15 Japan 26.36 H.Kong 6.18Lao PDR China 61.63 ASEAN 20.56 Japan 7.03Malaysia ASEAN 24.08 Japan 22.32 USA 12.72Myanmar ASEAN 78.98 EU-28 7.18 H.Kong 6.37Philippines USA 35.34 H.Kong 14.19 EU-28 13.39Singapore EU-28 29.33 USA 13.69 China 9.23Thailand Japan 52.80 ASEAN 17.61 USA 12.82Viet Nam Korea 29.56 ASEAN 18.25 EU-28 8.42ASEAN ASEAN 18.40 EU-28 16.66 Japan 14.53


2.72. In 2015, Indonesia was the largest recipient of FDI flows from other AMS at USD 9.50 billion or 42.76 percent of total intra-ASEAN FDI flows (Figure 2.8). Indonesia has overtaken Singapore as the top destination of intra-ASEAN FDI, as the former saw its share decreasing from as high as 50.72 percent in 2012 to 15.37 percent in 2015. In the case of Myanmar wherein intra-ASEAN constitute almost 80 percent of total FDI received, their share of total intra-ASEAN FDI has also increased significantly over the years to 10.03 percent in 2015 positioning it as the 4th top destination after Indonesia, Singapore and Malaysia.

Figure 2.8: Share of Intra-ASEAN FDI by Destination (%)


2.73. In terms of source country, in 2015, more than 67 percent of intra-ASEAN FDI flows originated from Singapore. Indonesia from which almost 29 percent of intra-ASEAN flow used to come in 2012, has seen its share decreased to around four percent in 2015. Another major source country of intra-ASEAN FDI flow is Malaysia whose share fluctuated from 23.64 percent to 4.97 percent during 2010 to 2015.

A F I M R 2 0 1 7 48

Figure 2.9: Share of Intra-ASEAN FDI by Source Country (%)


iii. Share of intra-ASEAN Portfolio Investment in Equity and Investment Fund to Total (WC-CMD )

2.74. The share of intra-ASEAN portfolio investment in equity and investment fund to total increased from 9.52 percent in 2014 to 10.66 percent in 2015 (figure 2.10). The amount of intra-ASEAN portfolio investment in equity and investment fund has actually decreased by 3.02 percent from 2014 to 2105. However, a larger decrease in the extra-ASEAN flows of 14.5 percent led to a net increase in the share of intra-ASEAN investment of total investment during the same period. In total, foreign equity and investment fund investment in ASEAN was USD 371.64 billion in 2015 or only two percent of USD 21.73 trillion in global flows.

2.75. Figure 2.11 indicates the destination within ASEAN of the equity and investment fund. As can be seen, Singapore remains the top destination capturing more than 38 percent of the investment in 2015, followed by Indonesia (20.18 percent), Malaysia (16.96 percent), Thailand (13.85 percent) and the Philippines (8.01 percent). In the case of Viet Nam, the country’s share of intra-ASEAN investment has steadily increased over the years and has reached almost two percent in 2015, reflecting increased attractiveness of this country as an investment destination. On the other hand, Malaysia has seen a significant decrease in its share of intra-ASEAN investment since 2012.

Figure 2.10: Portfolio Investment in Equity and Investment Fund in ASEAN

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Figure 2.11: Intra-ASEAN Portfolio Investment in Equity and Investment Fund by Destination (%)


2.76. Intra-ASEAN investment has been a very important as a source of equities and investment fund investment, with Lao PDR and Myanmar constituting 75.06 percent and 67.86 percent, respectively, of the total investment in 2015 (Figure 2.12). Indeed, as indicated by Table 2.10, intra-ASEAN investment ranked first among the sources of Equities and Investment Fund investment in these countries in 2015. It is also noteworthy that in some years, intra-ASEAN investment was the only investment received by Myanmar. As for the other AMS, the share of intra-ASEAN investment were relatively low at less than 20 percent in 2015. Nevertheless, as can be seen in Table 2.10, intra-ASEAN remains an important source of investment for these countries: 2nd in Indonesia, Malaysia and Singapore; and 3rd in Viet Nam. As for the Philippines and Thailand, intra-ASEAN is the 4th

largest source of international equities and investment fund investment.

Figure 2.12: Share of ASEAN Investment from Total Portfolio Investment in Equity and Investment Fund Received (%)

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Table 2.10: Top Three Source of in Equity and Investment Fund Investment in ASEANNo. 1 No. 2 No. 3



Brunei France 100.00 N/A N/ACambodia Luxembourg 64.06 Netherland 14.69 Norway 13.36Indonesia USA 43.18 ASEAN 13.56 Luxembourg 11.09Lao PDR ASEAN 75.06 Guernsey 6.90 Korea 4.93Malaysia USA 42.48 ASEAN 14.33 UK 11.32Myanmar ASEAN 67.86 India 31.00 Norway 2.00Philippines USA 48.47 UK 10.27 Luxembourg 9.57

Singapore USA 48.84 ASEAN 9.23 Luxembourg 4.80Thailand USA 45.29 Luxembourg 11.96 UK 10.04Viet Nam USA 35.07 UK 14.43 ASEAN 13.77


2.77. With regards to country of origin, more than 96 percent of the intra-ASEAN originated from Singapore and Malaysia. Figure 2.13 shows that the share of Singapore investment has decreased quite significantly since 2012 but there has been a steady increase in investment coming from Malaysia during the same period. Thailand, though still relatively small, has seen its share more than doubled in 2015 at 4.43 percent.

Figure 2.13: Intra-ASEAN Portfolio Investment in Equity and Investment Fund by Origin (%)

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2.78. Figure 2.14 however indicates while intra-ASEAN equities and investment fund investment remain to be important for Malaysia outward investment at almost 35 percent of its total investment in 2015, it has been on declining trend since 2013. ASEAN now is the second biggest destination for Malaysia international equities and investment fund (Table 2.11).

2.79. Similar trend is observed for the Philippines which has seen a significant decrease in the share of its intra-ASEAN investment from almost 25 percent in 2011 to less than two percent in 2015, positioning ASEAN as its 6th largest destination. As for Thailand, ASEAN is in 2015 its third largest destination constituting more than 10 percent of its total outward investment. In the case of Singapore, intra-ASEAN equities and investment fund is its 5 th

largest destination constituting approximately five percent of its total investment.

Figure 2.14: Share of ASEAN Investment from Total Portfolio Investment in Equity and Investment Fund Invested (%)

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Table 2.11: Top Three Destination of Equity and Investment Fund Investment by Country of Origin in 2015

No. 1 No. 2 No. 3



Indonesia China 24.27 H.Kong 16.85 Cayman Isl 9.92Malaysia US 38.92 ASEAN 34.28 UK 6.38Philippines US 53.73 Luxembourg 23.77 H.Kong 7.81Singapore US 25.27 China 15.15 India 6.38Thailand Luxembourg 30.76 US 30.02 ASEAN 10.70


iv. Share of Intra-ASEAN Portfolio Investment in Debt Securities to Total (WC- CMD)

2.80. In the case of Intra-ASEAN portfolio investment in debt securities, its share to total intra-ASEAN has also increased from 14.42 percent to 16.93 percent in 2015 (Figure 2.15). The amount of intra-ASEAN portfolio investment in debt securities was USD 48.47 billion, a decrease of less than one percent from 2014. However, the amount of extra-ASEAN portfolio investment in debt securities has decreased by more than 17 percent in 2015 leading to a decrease in its share to total investment from 85.58 percent in 2015 to 83.16 percent in 2015.

Figure 2.15: Portfolio Investment in Debt Securities in ASEAN

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2.81. In terms of country of destination, Malaysia has overtaken Indonesia as the top recipient of intra-ASEAN investment. In 2015, Malaysia received more than 32 percent of the total intra-ASEAN portfolio investment in debt securities, followed by Indonesia (30.66 percent), Singapore (18.39 percent), the Philippines (8.24 percent) and Thailand (6.78 percent).

Figure 2.16: Intra ASEAN Portfolio Investment in Debt Securities by Destination (%)


2.82. With regards to the importance of intra-ASEAN debt securities investment to the countries in the region, a trend similar to Equity and Investment Fund investment was observed (Figure 2.17). For Brunei Darussalam and Lao PDR, intra-ASEAN investment appears to be very important as a source of portfolio investment, constituting 100 percent and 97.14 percent of the total investment in 2015. However, for the other AMS, the share of intra-ASEAN investment were relatively low at less than 20 percent in 2015.Table 2.12 further corroborated the importance of intra-ASEAN investment for Lao PDR and Myanmar. The Table also shows that Intra-ASEAN investment is the second largest source of

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investment for five AMS (Indonesia, Malaysia, Philippines, Thailand and Viet Nam) in 2015. As for Singapore, intra-ASEAN is its 4th largest source of debt securities Investment in 2015.

Figure 2.17: Share of ASEAN Investment from Total Portfolio Investment in Debt Securities Received (%)

Brunei

Cambodia

Indonesia

Lao PDR

Malaysia

Myanmar

Philippines

Singapore

Thailand

Viet Nam

ASEAN0

20

40

60

80

100

120

2010 2011 2012 2013 2014 2015


Table 2.12: Top Three Source of Debt Securities Investment in ASEAN in 2015

1 2 3



Brunei ASEAN 100.00 N/A N/ACambodia Luxembourg 96.16 ASEAN 1.86 China 1.83Indonesia US 28.77 ASEAN 19.41 Luxembourg 16.66Lao PDR ASEAN 97.13 Korea 2.30 Luxembourg 0.30Malaysia ASEAN 23.77 US 19.17 Luxembourg 10.54Philippines US 23.63 ASEAN 14.13 Luxembourg 11.29Singapore US 21.39 Japan 13.10 UK 11.14Thailand Japan 22.63 ASEAN 13.96 US 12.10Viet Nam US 22.41 ASEAN 14.86 UK 14.85


2.83. Singapore is the main country of origin for intra-ASEAN portfolio investment in debt securities with a total investment of USD 43.41 billion or 70.24 percent of the total intra-ASEAN investment 2015.Another major source country is Malaysia which has seen its share increasing steadily from 8.06 percent in 2010 to almost 21 percent in 2015. The share of investment from the Philippines has also increased from 2.36 percent in 2010 to 5.13 percent in 2015.

Figure 2.18: Intra ASEAN Portfolio Investment in Debt Securities by Origin (%)

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2.84. On the other hand, for Malaysia, and to a lesser extent, the Philippines, ASEAN region has increasingly become the preferred destination for outwards investment in debt securities (Figure 2.19). For example, in the case of Malaysia, the share of intra-ASEAN investment in its total portfolio investment in debt securities has increased significantly from 26.94 percent in 2010 to almost 47 percent in 2015 while for the Philippines, the ratio has increased by 10 percentage points during the same period to reach almost 25 percent in 2015. ASEAN was Malaysia’s largest destination for outward debt securities investment in 2015, while ASEAN was the second largest destination for the Philippines and Singapore. In the case of Thailand, ASEAN is its third largest destination for debt securities investment, constituting more than six percent of its total investment. Finally, for Indonesia, intra-ASEAN was the fourth largest destination for debt securities investment.

Figure 2.19: Share of ASEAN Investment from Total Portfolio Investment in Debt Securities Invested (%)


Table 2.13: Top Three Destination of Equity and Investment Fund Investment by Country of Origin in 2015

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No. 1 No. 2 No. 3



Indonesia Netherland 39.33 US 5.18 China 4.00Malaysia ASEAN 46.78 US 10.70 Australia 6.84Philippines US 43.87 ASEAN 24.93 China 6.52Singapore US 30.41 ASEAN 7.14 India 6.67Thailand China 26.67 HK 16.08 ASEAN 6.19

III. In Focus : Financial Integration, Trade and Investment in ASEAN

2.85. The aim of this section is to analyse the extent to which the financial integration has been supporting the overall ASEAN regional economic integration agenda, with particular reference to its impacts on promoting growth in trade and investment. Box 2.2 below provides a review of the relevant studies in this area to provide context to our discussion.

Box 2.2: Financial Integration, trade and investment: A literature review

In the literature, studies on the impact of financial integration are mostly focused on economic growth (Guiso et al. 2004; Levine 2001; Schularick and Steger 2010). Financial integration stimulates economic growth through at least three channels: (1) financial integration improves allocation of capital more efficiently by facilitating the flows of financial resources flow to the most productive investment opportunities and ultimately increases the potential economic growth; (2) financial integration promotes risk diversification and risk sharing across countries since the increased use of financial instruments and cross-ownership of assets resulting from financial integration should expand opportunities to diversify portfolios and share idiosyncratic risks across regions; and (3) financial integration leads to financial system development, which subsequently influences economic growth (Ibrahim et al, 2016). In addition, according to Prasad, et al. (2003), financial sector development, as a result of financial integration, is considered as one of the direct channels through which the financial integration affects growth as portfolio flows, resulted from financial sector development, can increase more liquidity to the economy, and therefore, facilitates economic growth.

However, despite the rich body of work in this area, the existing studies suggest mixed findings on the relationship between financial integration and economic growth14. According to Schularick and Steger (2006), the difference in findings can be due to technical issues related to the selection of countries chosen as sample; the period under investigation and the estimation techniques. Also, as pointed out by Kose, Prasad and Taylor (2009), the effects of financial integration on economic growth vary significantly depending on the types of financial integration as well as on the characteristics of individual countries.

Edison et al. (2002a) or Fratzscher and Bussière (2004) found no robust long-term impact of financial openness on growth. Edison et al. (2002b) conducted another study to further assess whether financial integration contributes positively to growth under particular economic, financial, institutional, and policy environments. The study could not find a strong evidence that financial integration accelerates economic growth even under certain economic, financial, institutional, and policy characteristics.

In contrast, some studies reported that financial integration has a positive relationship with economic growth (Bekaert 2001; Edwards 2001; and Ibrahim et al. 2016). While in general these studies found that financial integration has a positive impact on economic growth, the growth impact of the financial

14 See Mougani (2012) for a relatively comprehensive review of the studies undertaken on the link between financial integration and economic growth.

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integration is not significant in countries with either ‘too high’ or ‘too low’ levels of economic development. The countries with too high levels of economic development do not use financial integration as a major source of funds to finance their economic activities. On the other hand, countries with too low levels of development generally lack of facilities to support financial integration thus pointing to the importance of ensuring the availability and readiness of relevant facilities to reap economic benefits from financial integration (Ibrahim et al, 2016).

The literature on the nexus between financial integration and trade, however, is relatively more limited than the one the link between financial integration and economic growth. There are multiple channels linking financial integration and trade. One of the main channels is that international banks follow their multinational customers around the world by providing them with financial services and exploiting informational advantages derived from long-term bank-client relationships (Inter-American Development Bank, 2002). An empirical study by Ronci (2004) examined this bank-client relationship using OECD data and found that disruptions to external trade financing explains the fall in trade flows during crisis episodes, after controlling for other factors that may affect trade volumes (such as domestic and external demand, exchange rates, and relative prices).

The link between financial integration and trade is investigated by Peters and Schnitzer (2015) by examining the impact of free trade agreement focusing on the North American Free Trade Agreement on Mexico. The study revealed that the impact of trade liberalisation on economic growth may be short-lived if it was not accompanied by financial integration initiatives. Moreover, Muthoga et al. (2013) examined the effect of financial integration on trade in East African Community (EAC) and concluded that regional financial integration not only stimulates the economic growth of EAC but also complements trade and potentially generates increased trade flows. The study, highlights several variables that may be disruptive to regional financial integration, such as misalignment of tariffs, inflation rates, exchange rates, rate of money growth and other vital macroeconomic variables between member countries. Furthermore, an empirical study on the finance-trade link at the firm-level showed that an increase in a country’s financial development increases the number of exporters and firms entering into the export market (Berman and Hericourt, 2008). Besides increasing the exporters’ activity, improvement of a country’s financial development is significant as this will lead to greater regional financial integration.

On the link between financial integration and investment, the literature highlights that foreign direct investment (FDIs) plays a conduit role in linking financial integration and trade. Indeed, financial integration if viewed from the perspective of capital account liberalisation, will presumably result in a higher volume of capital inflows and outflows both short term and long term. Thus the flows of FDIs can be considered as a proxy in order to capture the impact of financial integration on long term capital flows.15

In this strand of literature, a number of studies16 found that in recent years FDIs have stimulated intra-industry trade in the East Asian countries particularly in China. According to these studies, differences in comparative advantages and factor endowments between countries have encouraged FDIs, leading to increased regional economic integration through supply chains and production networks. However, as pointed out by Lamberte (2005), the link between FDI and trade may not be as straightforward and, depending on its types, FDI can also negatively impact trade.

References:Bekaert, G., R. Harvey and C. Lundblad (2001). Does Financial Liberalization Spur Growth? NBER Working Paper No. 8245.

Berman, N. and J. Hericourt (2008). Financial Factors and the Margins of Trade: Evidence from Cross-

15 It should be noted however that the determinants of FDIs extend beyond capital account regime and includes factors such as the size and growth potential of the host market, economic stability, and income level, as well as the quality of institutions and level of development.16 See for example, Fukao et al. (2003), Kawai (2005) and Zhang et al. (2005).

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Country Firm-Level Data. Documents de travail du Centre d’Economie de la Sorbonne 2008.50.

Chen, J. and T. Quang (2014). The Impact of International Financial Integration on Economic Growth: New Evidence on Threshold Effects. Economic Modelling, vol. 42, pp. 475–489

Edison, H., M. W. Klein, L. Ricci, and T. Slok (2004). Capital Account Liberalization and Economic Performance: Survey and Synthesis. IMF Staff Papers, Vol. 51, No. 2, 220-256.

Edwards, S. (2001). Capital Mobility and Economic Performance: Are Emerging Economies Different? NBER Working Paper No. 8076.

Fukao, K., I. Hikari, and K. Ito (2003). Vertical Intra-Industry Trade and Foreign Direct Investment in East Asia. Journal of Japanese and International Economies, vol. 17, pp. 468-506.

Fratzscher, M. and M. Bussiere (2004). Financial Openness and Growth: Short-Run Gain, Long-Run Gain? European Central Bank Working Paper No. 348.

Guiso, L. et al. (2004). Financial Market Integration and Economic Growth in the EU. Economic Policy, 19 (40), 524-77.

Ibrahim, S., A.R Mazlina, W.N.W Azman-Saini, and M.F. Mahamad-Zakaria (2016). Financial Integration–Growth Nexus : A Quantile Regression Analysis. Journal of Economic Integration,31(3), pp.531-546.

Kawai, M. (2005). East Asian Economic Regionalism: Progress and Challenges. Journal of Asian Economics, 16(1), pp. 29–55.

Kose, M.A., E.S. Prasad and A.D. Taylor (2009) Thresholds in the Process of International Financial Integration. NBER Working Paper 14916

Lamberte, M.B. (2005). An Overview of Economic Cooperation and Integration in Asia. In Asian Economic Cooperation and Integration: Progress, Prospects, and Challenges, published by the Asian Development Bank.

Levine, R. (2001). International Financial Liberalization and Economic Growth. Review of international Economics, 9 (4), 688-702.

Mougani, G. (2012). An Analysis of the Impact of Financial Integration on Economic Activity and Macroeconomic Volatility in Africa within the Financial Globalization Contexts. African Development Bank Working Paper No. 144.

Muthoga, S., O. Almadi, M. Kimani and M. Dianah (2013). The Effect of Regional Financial Integration on Intra-Regional Trade in the East African Community. International Journal of Economics and Management Sciences, 2(9), pp. 64-76.

Peters, K and M. Schnitzer (2015). Trade Liberalization and Credit Constraints: Why Opening Up May Fail to Promote Convergence. Canadian Journal of Economics, vol. 48(3), pp. 1099-1119

Prasad, E., K. Rogoff, W. Shang-Jin and M. Ayhan (2003). Effects of Financial Globalization on Developing Countries: Some Empirical Evidence. IMF Working Paper.

Ronci, M. (2004). Trade Finance and Trade Flows: Panel Data Evidence from 10 Crises. IMF Working Paper 04/225

Schularick, M. and T.M. Steger (2006). Does Financial Integration Spur Economic Growth? New Evidence from the First Era of Financial Globalization. CESIFO Working Paper No. 1691.

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Zhang, J., A. van Witteloostuijin, and C. Zhou (2005). Chinese Bilateral Intra-Industry Trade: A Panel Data Study for 50 Countries in the 1992–2001 Period. Review of World Economics 2005, vol. 141(3), pp. 510–40.

2.86. Within the context of ASEAN, since its establishment in 1967, the region has grown to become a vibrant and dynamic regional economy. In 2015, ASEAN was the 6 th largest economy in the world and was the 3rd largest in Asia. ASEAN is also one of the major players in the global trading system with a total trade of USD2.3 trillion in 2015, positioning the region as the 4th largest trade powerhouse after China, USA and Germany. ASEAN has also become one of the world’s fastest growing investment destinations, accounting for 6.8 percent of total global FDI flows in 2015.

2.87. Partly contributing to these achievements are the concrete initiatives undertaken by ASEAN such as tariff elimination, simplification of cross-border trading processes, including customs procedures and rules of origin, harmonisation of standards and technical regulations, mutual recognition arrangements, the creation of a business-friendly and innovation-supporting regional environment, as well as improvements in transport connectivity and other infrastructure networks. In addition, other factors such as cost effectiveness, rich resource endowment, relatively stable regional peace and security and the strategic location amongst major economies such as China, India and Japan have contributed to positioning of the ASEAN as an ideal production and distribution hub connecting global and regional markets.

2.88. The achievements above may also be partly contributed by the past and recent initiatives undertaken by various financial integration initiatives in ASEAN. Under the AEC Blueprint 2015, the ASEAN financial integration agenda aimed to achieve a well-integrated and well-functioning regional financial system with more liberalised financial services and capital account regimes and inter-connected capital markets. The overarching objective of all these financial integration initiatives and measures helped in facilitating greater trade and investment flows in the region. Financial integration was identified in the AEC Blueprint 2015 as part of the first AEC characteristic, which sought to create a single market and production base to provide its population with greater opportunities to trade and do business within the region and to make ASEAN a more attractive investment destination for international and domestic investors.

2.89. Following the formal establishment of the AEC on 31 December 2015 as guided by the AEC Blueprint 2025, financial integration is expected to continue to support trade and investment in ASEAN. Integration in the financial sector is envisaged under the first characteristic of AEC Blueprint 2025--a highly integrated and cohesive economy which aims to facilitate the seamless movement of goods, services, investment, capital and skilled labour within ASEAN to enhance trade and production networks as well as establish a more unified market for firms and consumers in the region.

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2.90. More specifically, there are several measures implemented through financial integration agenda under the AEC Blueprint 2015 that has contributed directly or indirectly to trade and investment. Under the FSL agenda, continuous progress has been made in liberalising the financial sector in the region through gradual removal of restrictions for ASEAN financial institutions to deliver financial services in other AMS. Progressive commitments have also been made by the AMS under the AFAS, signed in 1995. This has provided greater access for exporters/importers as well as investors to financial services that support their trade and investment activities.

2.91. Businesses have also benefited from significant progress made in the insurance sector though the liberalisation process guided by the ASEAN Insurance Integration Framework which was signed adopted by the ASEAN Central Bank Governors and endorsed by the ASEAN Finance Ministers in 2011. The Maritime, Aviation, and Transit insurance sector has been identified as the key entry point for the liberalisation process of the ASEAN insurance industry which will lower the cost of insuring cross-border business risks and help to spur intra-ASEAN trade.

2.92. Access to capital for existing and potential traders and investors has also been improved through the measures (e.g., ASEAN Disclosure Standards, the Streamlined Review Framework for the ASEAN Common Prospectus) under the ASEAN capital market development initiatives to develop a deep, liquid and integrated regional capital market in support of freer flow of capital across the region.

2.93. The growth in trade and investment is also facilitated through the improvement in the region’s payment and settlement systems (PSS). The WC-PSS have implemented several measures to improve the region’s domestic payment infrastructure, and promote more efficient cross-border payment and settlement services. Such measures include the adoption of the Principles for Product Transparency and Disclosure on Cross-Border Trade Settlement (Principles) which improve the level of transparency on charges and services offered by financial institutions in the ASEAN region for cross-border trade settlement. Trade in the region also benefited from the continuous efforts made by the WC-PSS to promote the use of regional currency for trade settlement.

2.94. With regards to investment, financial integration through initiatives, such as the Chiang Mai Initiative Multilateralisation (CMIM) which came into effect in March 2010, have contributed significantly towards macroeconomic and financial stability in the region. This in turn has increased the attractiveness of the region as a world-class investment destination. FDI has also benefited from the progress made in the area of capital account liberalisation, through the gradual removal of restrictions in the current account, FDIs, portfolio investments and other flows, as indicated in the AEC Blueprint 2015.

2.95. However, a more systematic and rigorous assessment needs to be conducted in order to fully assess the extent to which the financial integration measures and initiatives can contribute to the trade and investment in the region. For example, the gravity model may be used to analyse the determinants of trade flows in the region where a financial integration indicator can be incorporated into the model as one of the explanatory

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variables. On the other hand, such an exercise may be constrained by the data availability issues, particularly on indicators pertaining to regional financial integration.

IV. Conclusion.

2.96. This chapter provides a comprehensive review of the implementation of measures under the ASEAN financial integration track. The review is based on the list of annual priorities priorities presented by the relevant working committee during the Special Committee of the Whole (CoW) held on 21 January 2016 in Vientiane, Lao PDR as well as the list of Quantifiable Targets identified in the SAP.

2.97. Our review found that there has been a continued progress in ASEAN financial integration initiatives, indicating the strong commitments of the AMS in pursuing the financial integration within the region. Nevertheless, there are still a number of activities that could not be implemented as planned and wherein not much progress has been made. Of the nine identified priorities measures for 2016, only three out have been completely concluded.

2.98. The chapter also provided an update on the identification of the KPIs by all the Working Committees in reference to the SAP for ASEAN Financial Integration 2025. The baseline for all the indicators that have been determined and adopted. The working committee/group that have finalised and adopted their KPIs are WC-CAL, WC-CMD/ACMF, WC-FINC and AFT-WG. In the case of the AFT-WG, however, one of the three KPIs is still under consideration of the WG.

2.99. Finally, further analysis was conducted on four of the KPIs namely the KPIs identified by the WC-CAL: (i) share of intra-ASEAN portfolio investment to total portfolio investment in ASEAN and (ii) share of Intra-ASEAN FDI to Total FDI in ASEAN; and the KPIs identified by the WC-CMD: (i) share of Intra-ASEAN portfolio Investment in equity and investment fund shares to total and (ii) share of Intra-ASEAN portfolio Investment in debt securities to total.

2.100. Our analysis found that Intra-ASEAN portfolio Investment in Equity and Investment Fund and Intra-ASEAN portfolio Investment in debt securities appear to be more resilient as compared to the extra-ASEAN investment. This may not only be due to the home-biasedness of the regional investors but may also reflect that intra-ASEAN investors are longer term investors and may not be driven mostly by yield differentiation. Also, though the share of intra-ASEAN investment are still relatively low, it still constitutes a major source of investment for most of the AMS. With regards to the AMS from which these investment originated, ASEAN remains as an important destination for them. Nevertheless, as the financial sector in ASEAN develops together with the continuous progress made in the area of capital account liberalisation and capital market development, intra-ASEAN investment is expected to grow further in the future.

2.101. As for the intra-ASEAN FDI flows, though it is currently relatively small, it has been on an increasing trend over the years and has become one of the largest source of FDI flows to

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the region. The region’s positive economic prospects is expected to give rise to more investment opportunities which in turn will lead to further increase intra-ASEAN FDI flows.

2.102. Finally, the thematic discussion presented several channels through which financial integration can support and contribute to the growth of trade and investment, in the region. Nevertheless, further analysis is required to ascertain the direct impact of financial integration on trade and investment in ASEAN.

Conclusion and Way Forward.

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4.1. The global economy is expected to continue at a steady pace in 2017, with developed markets GDP growth picking up pace and emerging economies remaining on firmer footing. In ASEAN region, the economic outlook is projected to reach 4.6 per cent in 2017, a 0.1 percentage point increase from the estimated growth of 4.5 percent in 2016. However, several downside risks to the outlook remain. Rising political uncertainties in the advanced economies, the normalization of monetary policy, subdued growth in global trade as well as moderation in global capital flows are among the major risks expected to weigh on the regional as well as global growth. However, given its robust macroeconomic fundamentals in the form of well-diversified economic base, high foreign reserves and low external debts to name a few, ASEAN economies and its financial sector are expected to remain resilient in facing the impacts emanating from the global developments. Nevertheless, there are still areas of concern such as the relatively high level of credit to private sector which may become a source of vulnerability.

4.2. Therefore, ASEAN economies will need to bolster its fundamentals further to build resilience to manage vulnerabilities against future shocks through structural reforms to boost productivity and reinvigorate growth. At the same time, the region should leverage on the momentum of embarking on the new phase of regional integration to further strengthen intra-regional linkages in trade and investment to provide a cushion against the adverse impact on growth of global trade slowdown on growth and the potential increase of protectionism. In this regards, as TPP falters, the RCEP once concluded is expected to have a bigger a role in demonstrating the region’s resolve to counter the mounting protectionist sentiment.

4.3. ASEAN financial integration continued to show significant progress indicating the strong commitments of the AMS in pursuing the financial integration within the region. Guided by the SAP for ASEAN Financial Integration 2016-2025 and the annual priorities determined at the beginning of the year, all the working committees/groups under the finance track of the AEC have made tremendous efforts in ensuring all the activities scheduled for implementation this year, are implemented as planned. Nevertheless, there are implementation challenges. There is thus a need for the relevant working committees to identify the issues hindering the implementation of these measure and to identify the relevant solutions to be undertaken. Special focus will need to be given to measures with great difficulty in making progress.

4.4. There are nine finance-related measures that were submitted for monitoring as priorities for 2016:-

a. Completion of ratification of the Protocol to Implement the Sixth Package of the Financial Services Commitments (6th Protocol);

b. Completion of the enhanced financial services obligations through the Chapter on Financial Services of the ASEAN Trade in Services Agreement (ATISA).

c. Establishment of the ASEAN Insurance Forum (AIFo) as a platform for cooperation between the WC-FSL and ASEAN Insurance Regulators Meeting (AIRM) to integrate the ASEAN insurance sector;

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d. Finalisation of enhanced Capital Account Liberalisation (CAL) Heatmap Methodology;

e. Implementation of an effective and efficient post-trade framework, including on the relevant rules and practices;

f. Prioritisation and implementation of capacity building programmes through the ACMF Market Development Programme (A-MDP);

g. Review the ASEAN Corporate Governance (CG) Scorecard and develop an integrated system for CG assessment;

h. Conclusion of Cambodia’s negotiation for its first bilateral tax agreement and for other AMS to continue establishing their agreements with other AMS; and

i. Assessment of the impact of AMS’ current bilateral tax agreements.

4.5. However, only two of the activities have been successfully completed while the others are at different stages of implementation. The non-completion of priorities measures may have serious implication on the progress of financial integration as it may delay the implementation of other measures which are contingent upon their implementation. Indeed, the primary purpose of the annual prioritisation process is to facilitate the setting of intermediary milestones and assessment of progress in support of timely implementation of scheduled measures. Therefore, there is a need for the relevant Working Committees to carefully and strategically identify their annual priorities to enable financial integration agenda to move forward in a timely manner instead of creating bottlenecks that will unnecessarily hinder further progress to be made.

4.6. In addition to compliance monitoring, the AEC 2025 M&E Framework also comprises of outcomes monitoring which approximate the achievement of regional economic integration strategic measures/ objectives/goals, as stated in the AEC Blueprint 2025, and the corresponding sectoral work plans. In other words, progress in ASEAN Community building should be measured not only by looking at the number of measures or activities that have been implemented, but also by examining the extent to which these measures are benefiting and impacting its stakeholders. Therefore, the identification of indicators or KPI as a tool to measure these outcomes is crucial and require careful consideration.

4.7. In the case of financial integration, to date the working committee/group that have finalised and adopted their KPIs are WC-CAL, WC-CMD/ACMF, WC-FINC and AFT-WG. In the case of the latter, however, one of the three KPIs is still under consideration of the WG. It is also important to note that currently the KPIs only pertain to the financial integration pillar and financial inclusion pillar for WC-FINC. The KPIs for the financial stability are yet to be finalised. In total, there are 10 KPIs for which the baseline have been identified.

4.8. Further analysis have been conducted on four of the KPIs. The purpose of the analysis is to provide a better understanding of these indicators to identify the issues that may hamper its future growth and to propose solutions to be undertaken. These KPIs are (a) share of intra-ASEAN portfolio investment to total portfolio investment in ASEAN (WC-CAL),

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(b) share of Intra-ASEAN portfolio investment in equity and investment fund to total (WC-CAL), (c) share of Intra-ASEAN portfolio investment in equity and investment fund shares to total (WC-CMD) and (d) share of Intra-ASEAN portfolio investment in debt securities to total (WC-CMD).

4.9. Our analysis indicates that intra-ASEAN portfolio investment is still at its early stage of development. This is due to the wide disparity in the level of development in the financial markets across the region. Indeed, though nine of the ten AMS currently have a stock exchange, most of them are still relatively small by international standard. Similarly, while the bonds market has seen rapid growth in recent years, its level of development varied widely across countries. As a consequence, not all of the AMS can be active participant in and benefit from intra-ASEAN cross-border portfolio investment.

4.10. The reliance on a select few economies as a source of investment will definitely become a major constraint for intra-regional investment to grow further. Similarly, intra-ASEAN investment cannot grow without notable improvement in the financially less developed economies especially in term of the depth and efficiency of their financial sector, the regulatory frameworks as well as their capacity to absorb the investment. Though, significant progress have been made by these economies, they are still lagging behind the more developed countries as reflected by their scores in the category related to capital market in the World Competitiveness Index (Table 1.4).

4.11. It is also important to emphasize that ASEAN realises the importance of reducing the disparity of financial sector development amongst the AMS for furthering the progress of regional financial integration. In this regards, several capital-building initiatives have been implemented notably the ones undertaken by the Steering Committee for Capacity Building Initiatives to Support ASEAN Financial Integration (SCCB)17.

4.12. Nonetheless, our analysis also points to the great potential for intra-ASEAN portfolio investment to grow further in the future. With the positive economic prospects in the region leading to growing prosperity and more investment opportunities, it is expected that more investment will be channeled towards the region in the future. Also, the region is home to some of the biggest sovereign wealth funds and pension funds in Asia and the world 18 which may in the future choose to allocate more investment in the region. 17 The SCCB is co-chaired by ADB together with the South East Asian Central Banks Research and Training Centre (SEACEN). ADB has supported ASEAN central banks since 2009 in assessing the financial landscape and formulating milestones for monetary and financial integration, which led to the publication of a combined study in 2013. The study provided (i) threshold conditions, milestones, and necessary institutional arrangements for integration; and (ii) identified capacity gaps among ASEAN member states. This led to the formation in March 2013 of the SCCB by the ASEAN Senior Level Committee on Financial Integration (SLC).18 In the latest edition of Pension & Investment (P&I) / Willis Towers Watson 300 Analysis (2016), two pension funds from the region are ranked in the top 15 namely Central Provident Fund Singapore with total asset of USD211,373 mil at no. 8 and Employees Provident Fund Malaysia at no.14 with total asset USD161,707 mil. Other funds from the region ranked in the top 300 list are Retirement Fund-KWAP Malaysia (no.136, total assets: $28,341 mil) Government Service Insurance Philippines (no.192, total assets: USD20,491 mil) Government Pension Thailand (no. 198, total assets: USD19,754 mil), and Social Insurance Funds Vietnam (no. 204, total assets: USD19,352 mil).

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4.13. It is also noteworthy that intra-ASEAN portfolio appeared to be more resilient as compared to extra-ASEAN flows. And as developed countries starts to tighten their monetary policy, the slowing down of global capital flows in recent years to the emerging market are expected to continue. It has thus become even more crucial for ASEAN to continue the efforts undertaken to further liberalise the capital account as well to develop the capital market to support the flow of intra-ASEAN capital flows. However, as capital flows are determined by a host of factors specific to a particular country, it is also important for the economies in the region to identify these factors and to improve the relevant infrastructure in order for them to leverage on these factors.

4.14. With regards to intra-ASEAN FDI, though it is currently relatively small, it has been on an increasing trend over the years. In 2015, intra-ASEAN FDI is the largest source of FDI flows for ASEAN. The increasing uncertainties of the global economy leading to subdued economic growth in major source countries of FDI will adversely impact FDI flows to the region. In the long term, with the improvement in the investment environment in the region as AMS implement more measures to liberalise, facilitate, protect and promote investment the region, intra-ASEAN FDI flow is expected to increase further and would constitute a viable alternative to extra-ASEAN FDI to support the region’s economic growth.

References

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ASEAN (2015). ASEAN Economic Blueprint 2025. Jakarta, Indonesia.

Asian Development Bank (2016). Asian Development Outlook Update. Manila

European Central Bank (2016). Financial Integration in Europe. Frankfurt, European Central Bank.

Inter-American Development Bank (2002). Beyond Borders: The New Regionalism in Latin America: Economic and Social Progress in Latin America. Economic and Social Progress Report Series.

International Monetary Fund (2016). Global Financial Stability Report. Washington DC.

International Monetary Fund (2017). World Economic Outlook Update. Washington DC.

Kawai, M. (2005). East Asian Economic Regionalism: Progress and Challenges. Journal of Asian Economics, 16(1), pp. 29–55.

Will Towers Watson (2016). Pension & Investment (P&I) / Willis Towers Watson 300 Analysis. Birmingham Alabama.

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