Asean’s 2015 deadline for economic integration is looming, but limited awareness and a lack of harmonisation are stalling the association’s progress. Melodie Michel reports.
With its 600 million people and US$2tn economy, the group of countries that form the Association of Southeast Asian Nations (Asean) has the potential to be a heavy player in the global arena. 2013 GDP growth in the area was around the 5 to 6% mark, led by Indonesia, Thailand, Malaysia and Singapore, and, according to the IMF, the region’s overall GDP is expected to almost double by 2018, reaching an estimated US$3.8tn.
In the short term the region presents massive opportunities for outside investors and exporters, with ever-growing consumer demand. Vikas Arora, Deutsche Bank’s head of trade finance and cash management for corporates in Asean, tells GTR: “From a demand point of view, this is a region that is going to consume a lot more than it has in the past. With the increasing middle-class segment in countries such as the Philippines, Indonesia or Vietnam, we also see opportunities for companies to do business in this part of the world tapping into the relatively low-cost labour base. Corporates can benefit from the Asean bloc as it becomes more integrated.”
But in the longer term, a more integrated Asean could even shift global trade dynamics. Simon Constantinides, regional head of global trade and receivables finance business in Asia Pacific at HSBC, explains: “If the region starts to work more collectively, they will become a greater force in world trade, and could expand outside of Asia and compete with the other big blocs of Europe, North America and China.”
The association is well aware of its own potential, and for the past 10 years has put various directives in place to encourage economic growth and collaboration. Since January 2010, Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand have scrapped import duties on 99.65% of traded tariff lines, while Cambodia, Laos, Myanmar and Vietnam have reduced 98.86% of theirs to between 0 and 5%.
At the 12th Asean summit held in January 2007 in the Philippines, leaders signed the Cebu “declaration on the acceleration of the establishment of an Asean community by 2015”, affirming their commitment to facilitating the economic integration of the region. As part of this development, Asean is currently working on the design and mechanism of a trade repository that would serve as a source of regulatory information at regional and national levels and be accessible online for exporters, importers, traders and government agencies.
Among general efforts to align to international customs practices, the organisation is developing the Asean single window (ASW) to facilitate the movement of goods by providing a partnership platform between government agencies and economic, transport and logistics operators. National single windows have already been activated in Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand, though at various levels of operational development, and the association is working towards the development of electronic processing of its customs declaration document.
But despite an undeniable collective desire to become more integrated, progress in that direction has been stalled by individual countries’ slow modernisation.
Slow on the uptake
The main obstacle Asean needs to overcome to reach economic integration is its lack of harmonisation – in terms of both regulations and processes.
Parvaiz Dalal, head of structured trade and asset distribution, Asia Pacific at Citi, says: “All the countries might not be equipped to handle the cross-border flows in terms of regulations. Some still have a more conservative approach, which makes it difficult to harmonise the offering across all Asean countries. Certain countries still require a physical copy of the exchange control bill of entry for remitting money out of the country. Certain countries, for example, Cambodia, Laos, Sri Lanka, Bangladesh and Indonesia, still require central bank reporting which makes it difficult to digitise the cross-border payments. Consciously, these countries will follow because they don’t want to be left out or seen as inferior. They want to be an integral part of Asean. If flows start segregating, 95% of them will be handled by harmonised economies.”
The fact that countries are at different stages of economic development means they have to juggle different priorities. In Cambodia, Laos, Myanmar and Vietnam, the focus is on social reforms and infrastructure development, whereas in Singapore, Malaysia and Thailand, multinational companies and large corporates have aspirations to grow into the wider Asean footprint. “Harmonisation does not come without its own challenges. We’ve seen the experience in the EU, so keeping all that in mind, I think that the Asean integration is going to be an evolving story. Corporates should really start to see the benefits through the supply chains when all the Asean countries bring down their trade barriers and strengthen their infrastructure,” adds Arora.
Another issue Asean is still facing is a lack of awareness about the upcoming Asean Economic Community (AEC). According to a survey conducted by the Asian Development Bank (ADB) in 2012, over half (55%) of the 381 firms interrogated were not aware of the AEC. The ADB attributes this to various factors; mainly the small amount of information disseminated by respective governments about the existing measures and upcoming deadline. The survey also found that non-tariff barriers, including different regulatory standards, excessive regulation and lack of information about foreign business environments dominated the respondent firms’ concerns.
Chinese ties
According to the ADB survey, more businesses are aware of the Asean-PRC free-trade agreement (which came into effect in 2010) than of AEC 2015. This is not surprising in itself, considering that China is the largest trading partner for most of the countries in the Asean region.
At the moment, China engages with each of the countries individually, but Asean member nations realise they could weigh more in trade negotiations with the superpower if they were perceived as one bloc. “A lot of these countries compete with each other, so they’ve got to come together instead of compete in every phase. There’s a willingness to do so because there is that continued big shadow to the north called China. It’s becoming stronger and stronger, and these countries realise that by coming together, they can get more strength through collaboration and collectiveness rather than division,” says Constantinides at HSBC.
More and more Chinese companies are looking at tapping into the Asean market via Singapore, which Asean is starting to see as a type of gateway for the bilateral relationship. “Some of the countries have started making their infrastructure align to China’s growth and requirements by Chinese counterparties. For example, there are strong ties between Singapore and China, which creates a corridor between China and Asean. That makes the region aligned to Chinese requirements,” says Dalal.
At Deutsche Bank, Arora has noticed a growing number of Chinese companies hosting their treasury centres in Singapore. “By doing so, they can access a much bigger market once Asean becomes integrated,” he adds.
One of the reasons why Singapore is a logical choice is its developed banking system, particularly when it comes to handling the Chinese currency. The renminbi (Rmb) has been promoted for internationalisation by the Chinese government, but is not the preferred currency for most of the country’s companies. Although the Asean region is still largely US dollar-denominated, it is only a matter of time before businesses adopt the currency of their most important trade partner.
“The Rmb trade momentum is only going to continue. Today, these countries are trading in US dollars but it’s not the currency of any of them, and you can’t have the currency of the second-largest economy in the world sitting on the sideline forever. The PRC already has currency swap agreements with multiple markets, and as the Rmb becomes more or even fully convertible, that will create much more opportunity,” Constantinides points out, while Arora believes the change is likely to take place over the next four to five years.
Being equipped to handle Rmb is therefore becoming a critical component for banks operating in Asean – something both international and local players understand. “Each of the banks play a critical role, whether they are international or local,” says Dalal at Citi. “If you look at banks in Singapore, they are all equipped to handle Rmb, both for capital markets and current accounts transactions. Local banks are equally participating in the flows. When you go to the other Asean countries, the large local banks are already equipped and they are putting lot of effort into handling Rmb flows. In countries like Malaysia, Philippines and Indonesia we see local banks handling Rmb current account flows actively. For capital flows it will take time but banks are already deeply involved and getting equipped. Some are handling basic products, some are a lot more advance. I don’t think local banks are left behind, because the need is coming from their clients, and are supported by flows from China.”
Banking relations
When it comes to making the most of the economic integration of Asean, bank partnerships will be key. While big global banks can bring in expertise, liquidity and technology, the success of the free-trade area also relies on small, local players, particularly to access the SME segment.
Constantinides admits that HSBC is “not as focused on the lower end of the market as local banks might be”, while Dalal explains that certain counterparties in the SME sector “are outside the target segment”.
And while the ADB is constantly working on ways to support SMEs – most recently with a US$800mn supply chain finance agreement with Standard Chartered – the expansion of SME trade can’t rely solely on multilateral development banks. “The profit margins for banks are healthy when they lend to SMEs and hence international banks do make a serious effort to create necessary infrastructure and programmes offering financing to SMEs of the world. [They] are trying to bridge that gap by offering programme-based financing by predicting risk on large buyers – who are existing credit clients of the bank. They are also using other risk mitigation techniques, like insurance, participating in programmes offered by developmental agencies and offering attractive financing under central government loan programmes,” says Dalal.
Citi has been developing its supply trade finance offering in Thailand, Indonesia, Malaysia and Singapore, and hopes to continue to extend financing to SMEs as it unfolds its strategy. In some cases, the bank resorts to tie-ups with local players, particularly to overcome location issues that make it hard for a big operator like Citi to communicate with suppliers. Deutsche Bank has also developed an in-house financial supply chain platform to help corporates with this type of need. “For example, a cement manufacturer setting up a plant in Myanmar or expanding in Vietnam would most certainly need support on the supply chain finance side to cater on the sale side and on the budget side for their materials.
“Partnerships with local banks are also key. We bring in the product expertise and technology, and the local banks bring in access as they have the relationships with the suppliers, which in some cases can account for thousands in relation to one client. As a result, we prefer to partner with a select few to complement our expertise and services,” explains Arora.
He adds that the supply chain still needs to use a hybrid model, as paper remains unavoidable in shipping documents, but electronic invoicing is gaining momentum among corporates.
And although supply chain finance is definitely growing in importance in the region, the significant infrastructure deficit in some Asean countries is also an opportunity for direct investment and syndications.
Another proposition that seems to resonate with Deutsche Bank clients is the concept of regional treasury centres. “As companies within the Asean region look to expand within other Asean countries, they can better manage their risk centrally via a regional treasury centre, rather than doing it in single locations where they may not have access to the full depth of liquidity and risk management tools,” says Arora.
Once again, Singapore is the optimum place to set up such treasury centres, in terms of access to international markets and world-class infrastructure, but companies are also looking at Malaysia.
It’s unlikely Asean will reach complete economic integration by 2015, but the association will have to prove its progress when the deadline hits, promoting more awareness among businesses and defining key issues to focus on – which should further bolster the region’s trade momentum.
