ASEAN’s financial development gap

In 2015, the 10 members of the Association of Southeast Asian Nations (ASEAN) are expected to create an integrated regional market called the ASEAN Economic Community (AEC). This will, in effect, create an economic union with the intent of facilitating trade, strengthening political ties and increasing financial harmonization across the region.

At the 13th ASEAN Summit in 2007, it was agreed that in order to fully realize the benefits of economic integration it would be necessary to narrow the development gap between member countries. From this realization came the Initiative for ASEAN Integration (IAI), which seeks to promote financial and economic development by accelerating the free flow of goods, services and investment across the ASEAN countries.

Although the IAI work plans have led to some progress, the financial development gap between ASEAN countries remains quite stark. Singapore sits at the most advanced end of the development spectrum, ranking 4th out of 62 countries globally in the World Economic Forum’s annual Financial Development Report. Singapore’s foreign exchange, derivatives and equity markets are regarded as some of the most advanced in the world, not just the region. Furthermore, Singapore’s highly developed financial markets are complemented by a favourable legal and regulatory framework, as well as efficient and effective contract enforcement mechanisms.

Moving down the development spectrum are Malaysia and Thailand, which rank 18th and 34th. Like Singapore, Malaysia and Thailand are relatively strong in their financial intermediation capabilities, in particular the size and depth of their equity and debt capital markets. However, Malaysia and Thailand’s enabling environment – institutions, laws and regulatory framework – are underdeveloped, especially when compared to that of a country such as Singapore.

The Philippines, Indonesia and Vietnam have comparatively immature financial systems and rank 49th, 50th and 52nd, respectively. Whereas Vietnam lags in non-banking financial services, such as IPO activity and insurance, Indonesia and the Philippines are quite underdeveloped in retail access to financial services, and have relatively small and inefficient banking sectors. Capital account and domestic financial sector liberalization, among other factors, will be critical for these countries as they look to further develop their financial systems.

Although Cambodia, Laos and Myanmar are not included in the rankings, it is evident that these countries have nascent financial systems. Therefore, the ability for them to close the development gaps will depend on whether the respective governments can identify and carry out the appropriate legal, regulatory and market-oriented reforms.

Regional integration has the potential to provide a considerable boon to the ASEAN members’ economies and further improve the region’s competitiveness vis-à-vis China and India. However, integration between countries of widely divergent levels of development could cause significant challenges, particularly in times of financial instability. In order for ASEAN to fully realize the benefits of integration, the least developed countries in the region will need to be fully committed to opening and developing their financial sectors over the coming years.

Author: Todd Glass is a Project Associate on the Financial Services Industries Team at the World Economic Forum USA and co-author of the Financial Development Report

Image: I man walks past buildings in Singapore’s central business district REUTERS/Nicky Loh