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Analysis: Recent developments in ASEAN capital markets
Indonesiaâs financial market is one of the most lucrative markets in the region
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Indonesia's financial market is one of the most lucrative markets in the region. As per mid December 2014, Indonesia's capital market index achieved 17.8 percent year-to-date growth, in fourth place after China, India and the Philippines.
Despite its capital-reversal pressure, Indonesia's bond market still posted a relatively good performance compared to Brazil, South Africa and Malaysia. The foreign capital flows will still have both positive and negative impacts on Indonesia's capital market. However, the challenge of the capital market will be greater in the future when ASEAN member countries integrate their capital markets by 2020 as part of the implementation of the ASEAN Economic Community (AEC).
Together with other ASEAN capital markets, several concrete actions need to be taken. The huge gap in development of capital markets across the ASEAN member countries will create instability when they form a single market or a liberalized market. Thus, the first challenge to be overcome is boosting the development of some ASEAN countries' capital markets.
ASEAN equity markets need improvement and collaboration.
In relation to the liberalization of capital flows, the blueprint of AEC includes two initiatives that must be implemented by ASEAN countries; strengthening ASEAN capital market development and integration and improving the flow of capital in the region through the process of liberalization. In terms of development, ASEAN equity markets need to be improved. Of the ten countries in ASEAN, not all of them have equity markets. At the moment, there is currently no stock exchange or self-regulatory organization in Brunei Darussalam and Myanmar. The capital markets of Brunei Darussalam are currently in the development stage, while Myanmar has a plan to open its capital market by 2015. Otherwise, there are well established financial supervisory infrastructure and capital market structures in the other ASEAN countries namely Cambodia, Indonesia, Laos, Malaysia, Philippines, Singapore, Thailand and Vietnam. The next collaborative step in the capital markets and to promote ASEAN as one asset class is by officially introducing ASEAN Exchanges. ASEAN Exchanges is a collaboration of seven exchanges from Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam to provide greater exposure and access to the diverse range of companies across ASEAN.
According to the World Federation of Exchanges, the domestic market capitalization of Asia-Pacific in October 2014 increased 9.8 percent year-on-year to a total of US$20.3 trillion, while in six ASEAN stock markets ' Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam ' capitalization reached $2.5 trillion which is only 3.9 percent of the global figure. ASEAN's market capitalization jumped 12.2 percent in October 2014 compared to the December 2013 position due to higher share prices and new listings. In detail, Singapore's market capitalization of $769 billion in October 2014 was the highest capitalization among other ASEAN stock markets. Furthermore, in the middle of the global financial volatility this year, the best equity market performer among ASEAN countries was the Philippines with a stock market index return of 24 percent year-to-date as of November 2014. The next two top performers were Thailand and Indonesia with equity returns of 23 percent and 20 percent, respectively. This year, Cambodia was the worst-performing equity market, losing 18percent
year-to-date.
Regarding bond markets, the development of local fixed income markets in ASEAN countries has expanded significantly in recent years. The current policies and regulations such as interest rate policy and hedging in several ASEAN bond markets had an effect on ASEAN financial transactions. The fastest growing bond market in the region on a quarterly basis was Singapore with growth of 4.7 percent and outstanding bonds amounting to $252 billion in the third quarter this year. While Indonesia's local currency bond market expanded by 2.7 percent quarter-on-quarter to reach an outstanding size of $124 billion in the same period. Among all markets in ASEAN, Malaysia had the highest share of bonds to GDP at 102 percent. In contrast, Vietnam and Indonesia had the smallest shares of bonds to GDP in ASEAN at 21 percent and 15 percent, respectively. The risks to the region's bond markets are rising, including tightening liquidity in the region's corporate bond markets and an expectation of a US Federal Reserve rate hike that could raise borrowing costs and lead to the further appreciation of
the US Dollar.
The outlook for ASEAN capital markets next year will still be volatile amid global economic uncertainty. Decelerating economic growth on the back of rising inflation and tightening monetary policy have weighed on ASEAN equity and bond markets. With expectations of slower economic growth in emerging Asian economies and by seeing relative valuations swing in favor of other global markets, investors began to rotate its funds out of the region's equities to the US, which has better economic prospects next year. Having said that, we believe the existence of AEC 2015 is expected to strengthen the competitiveness and bargaining power of ASEAN countries in the international market. The establishment of the AEC will strengthen the position of the member countries in dealing with international negotiations. It is expected that the realization of the AEC will enhance regional cooperation and the bargaining power of the member countries, such as in negotiations on free trade agreements (FTAs). However, it is also necessary to note that the improvement of competitiveness will not occur automatically, immediately or concurrently. Liberalization entails risks related to the readiness of the countries concerned and they will be more vulnerable to external fluctuations. There will also be competition among member countries (intra-ASEAN) due to the elimination of barriers to the flow of goods, services, investments, skilled labor and last but not least, capital.
AEC 2015: New Challenges for Indonesia. Challenges for Indonesia in anticipating the AEC among other things include sufficient support from all stakeholders, in terms of economic policies, a better domestic labor market and business actors. Indonesia as part of the ASEAN community must endeavor to improve its domestic quality in order to take those opportunities and to compete with other ASEAN countries, so that the probability of losing competitiveness in its own region due to the establishment of the AEC can be minimized.
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The writer is a quantitative analyst at Bank Mandiri
