Interview: Rabboni Francis B Arjonillo
What potential can be unlocked from the integration of South-east Asian stock markets?
RABBONI FRANCIS B ARJONILLO: For ASEAN countries, the integration of the region’s stock markets will be a gradual, long-term process that follows the “ASEAN way” of consensus in decision-making. The integration is also part of the wider goal of ASEAN financial integration that addresses key issues such as insufficient physical and financial infrastructure. A key hurdle is that despite considerable efforts to develop domestic stock markets, they are not much larger now, relative to GDP, than they were a decade ago. For instance, Indonesia’s stock market capitalisation to GDP ratio of 43% now lags regional peers like Malaysia, which has a ratio of 120%. It is also way behind Thailand and the Philippines, which already have stock market capitalisation to GDP ratios of 91% and 86%, respectively. Singapore constitutes the biggest stock market capitalisation at $485bn, with a comparable ratio of 160%. Collectively, however, an integrated stock market – even for just the ASEAN-5 – will raise the market capitalisation to GDP ratio to 82%. The improved size could end up pulling large amounts of capital into ASEAN, even as global interest rates gradually increase. The small size of stock markets in each individual country hinders and limits efficient capital flows. Capital markets should be able to fund ASEAN investment needs, with the biggest requirement being infrastructure finance.
The ASEAN Capital Markets Forum, which focuses on the harmonisation of domestic laws and regulations, and the development of market infrastructure, will eventually help to integrate the region’s equities markets. In 2012 exchanges in Singapore, Malaysia and Thailand created the so-called ASEAN Trading Link, an electronic order-routing system that means clients of brokers in Malaysia and Singapore can trade on each other’s exchanges more easily. However, the link also necessitates the building of post-trade linkages before market participants engage in cross-border trading on any scale. These linkages relate to clearing, settlement and custody links, which could make the ASEAN Trading Link a fully fledged end-to-end platform. However, progress has been slow. Thus, as a whole, financial integration has been disappointing and is lagging behind efforts to integrate trade within the region.
The advantages of the trading link are huge for the 10-member bloc. The trading link could provide greater market access to a large retail base, a wider product selection across markets and allow ASEAN a stronger market presence in the global arena. Eventually, ASEAN will be an investible asset class and will have a bigger investor base, leading to the deepening of markets. Increased competition will challenge participants to carry out product innovation and diversification to tap the collective savings pool of the region. This can be funnelled to infrastructure, a key growth driver for the region’s economies that is in great need of funding.
To what extent do you see new product offerings driving future growth?
ARJONILLO: The Philippine capital market is still emerging. The prevalence of scandals and scams in the market is a reflection of both fragile regulations and the low financial literacy of retail investors, with surprisingly large cash savings, that seek high-yielding investment opportunities. This excess cash should be going to public-private partnerships (PPP), but unfortunately the product offerings are not there to mobilise the untapped savings of the country, which have risen to 35% of GDP. Moreover, money from long-term investors, such as pension funds and insurance companies, should be finding investment channels aligned with the country’s key development projects. PPP projects could represent opportunities for such investment, as they generate long-term cash-flow streams that, for instance, can be securitised.
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