Asean+3 capital market swot analysis

FINAL REPORT:SWOT ANALYSIS ON THE CAPITAL MARKET

INFRASTRUCTURE IN THE ASEAN+3 COUNTRIES AND ITS POLICY IMPLICATIONS

FINAL REPORT: SWOT ANALYSIS ON THE CAPITAL MARKET INFRASTRUCTURE IN THE ASEAN+3 COUNTRIES AND ITS POLICY IMPLICATIONS


PENELITIAN DAN PELATIHAN EKONOMIKA DAN BISNIS (P2EB)| FEB UGMPENELITIAN DAN PELATIHAN EKONOMIKA DAN BISNIS (P2EB)| FEB UGM

RESEARCH BACKGROUND ASEAN+3 economies have been recovering from the global financial crisis, and

posting steady growth in 2012.

Policy uncertainty, private deleveraging, fiscal drag, and impaired credit intermediation continue to weigh on global growth prospects.

ASEAN+3 region remain vigilant of the unintended negative side effects stemming from an extended period of global monetary easing on the region as well as on the risk of global financial markets sentiment

ASEAN+3 Strategy for enhancing market integration and regional financial stability: Chiang Mai Initiative Multilateral (CMIM), ASEAN+3 Macroeconomic Research Office (AMRO).

Capital market development in the ASEAN+3 region is vary.

This study proposes to analyse the recent development of capital markets infrastructure and its policy implications in the ASEAN+3, and provide recommendations on how to enhance capital markets integration and financial stability in the region.

ASEAN+3 CURRENT ECONOMY DYNAMICS




Figure: ASEAN Countries GDP Growth Constant Price, 1998-Q3/2013 (YoY,%)Economic Growth of key economics in the region show lower than expected

ASEAN member economics yet meet their full potential economic growth; Philippines impress not only ASEAN but also Asia at-large with their respectively recorded

growth averaging 7% along 2013; ASEAN region becoming a refugee place by foreign investors from the continuing after-effects of

global financial meltdown.

Source: IMF, CEIC (2013)

Figure: China, Japan, South Korea GDP Growth Constant Price, 1998-Q3/2013 (YoY,%)Economic Growth of key economics in the region show lower than expected

China’s as the world’s second largest economy recorded performance in 2013 as the slowest pace expansion on economy ever recorded in 14 years;

Japan economy at the first half of 2013 seems to show signs of weakening but fortunately it limitedly saved by the “Abenomics”;

South Korea record confident economic growth supported by front-loaded government spending and positive contribution from private sector.

Source: IMF, CEIC (2013)

Table: ASEAN+3 Stock Market Index Growth, 2009-2013 (YoY, %)Regional stock market record positive trend of growth

Source: Bloomberg (2014)

The growths which happen in regional stock market is showed as the optimism for regional economic prospectus through the eyes of foreign investors.

The flood of foreign capital inflow then resulted to the rapid growth in real estate prices, increasing domestic consumption and accumulating household debt .

Table: ASEAN+3 Exchange Rate Development, 2009-2013 (YoY, %)Global trade uncertainty highly affect the regional exchange rate fluctuation

Source: Bloomberg (2014) *= During this year Myanmar having currency adjustment

The declining in the trade of balance on the most countries in the region then turn into the weakening of regional currency compare to United States Dollar (US$).

This pressure in regional currency potentially to be further since the Federal Reserve of US and Bank of Japan plan to having quantitative easing program

ASEAN+3 FINANCIAL SECTOR DEVELOPMENT




ASEAN+3 FINANCIAL SECTOR COOPERATION The ASEAN Economic Community (AEC) blue print liberalization measures of the financial

services sector should allow members to ensure orderly financial sector development and maintenance of financial and socio-economic stability.

Two principles of financial liberalization: First, the Liberalization is through ASEAN minus X formula where countries that are ready to liberalize can proceed first and be joined by others later. Second, the liberalization process should take place with due respect for national policy objectives and the level of economic and financial sector development of the individual members.

Roadmap for Monetary and Financial Integration of ASEAN (RIA-Fin). Endorsed by the ASEAN Finance Ministers Meeting (AFMM) that consists of four areas: (a) Capital Market Development, (b) Liberalisation of Financial Services, (c) Capital Account Liberalisation and (d) ASEAN Currency Cooperation, with the ultimate goal of greater economic integration in ASEAN by 2015.

In finance and monetary cooperation, the focus continues to be on the implementation of the Chiang Mai Initiative Multilateralisation (CMIM) and the Asian Bond Market Initiative (ABMI). The CMIM is supported by the ASEAN Plus Three (APT) Macroeconomic Research Office (AMRO) in Singapore, which commenced its operations in 2011.

Figure: Financial Assets in ASEAN+3 Countries, 1997-2012 (% of GDP)From bank dominated industries to more financial deepening

Transformation upon regional banking industry into more cross border banking have been slow to develop.

Source: IMF, World Bank, Asian Bond Online, CEIC (2013)

0

100

200

300

400

500

600

1997 1998 2000 2005 2008 2009 2010 2011 2012

Brunei Darussalam Cambodia People's Republic of China IndonesiaJ apan Republic of K orea Lao PDR MalaysiaMyanmar Philippines Singapore Thailand

Table: Market Capitalization to GDP RatioASEAN Capital Market has a significant performance progress for the recent years

Financial deepening is vary between ASEAN+3 member economics.

Source: CEIC, Bloomberg (2014)

Figure: Bank Assets, Stock Market Capitalization and Bond Market Capitalization in ASEAN+3 Countries, 1997 and 2012(% of GDP)Financial deepening in regional economy members are vary

Countries with larger stocks of financial assets tend to have better developed capital markets. Singapore, Malaysia, Thailand, China, Japan, and Korea were categorized as advanced financial. Philippines, Indonesia, and Vietnam have medium development of the financial system. It can

be said that those countries have a complete financial structure (banks, stock and bond markets) but at a low level and characterized by bank dominance.

Brunei Darussalam, Lao PDR, Myanmar, and Cambodia have low development of the financial system.

Source: IMF, World Bank, Asian Bond Online, CEIC (2013)

ASEAN+3 CAPITAL MARKET DEVELOPMENT

Source: ASEAN Capital Market Implementation (2009)

Table: Bond Market Capitalization in ASEAN+3 Countries, 1997-2013 (% of GDP)Japan, South Korea and Malaysia are leading in bond market deepening

Source: Asian Bond Online, CEIC (2013)

INDICATORS COUNTRIES 1997 1998 2000 2005 2008 2009 2010 2011 2012 2013Brunei Darussalam NA NA NA NA NA NA NA NA NA NA

Cambodia NA NA NA NA NA NA NA NA NA NA

People's Republic of China 3.51 5.01 7.07 10.71 15.93 19.32 21.46 23.08 12.47 14.95

Indonesia 1.55 1.57 1.34 2.23 1.57 1.50 1.61 1.41 2.27 2.43

Japan 43.25 47.84 48.14 40.98 40.33 39.74 37.34 37.19 18.02 17.32

Republic of Korea 29.66 45.95 50.72 53.04 56.43 65.73 66.83 59.25 75.18 79.38

Lao PDR NA NA NA NA NA NA NA NA NA NA

Malaysia 35.86 41.23 32.79 47.42 56.49 58.89 58.67 58.09 42.61 42.55

Myanmar NA NA NA NA NA NA NA NA NA NA

Philippines 0.19 0.20 0.21 0.71 0.93 0.93 1.03 0.96 4.98 4.83

Singapore 9.87 11.52 16.52 17.81 16.60 14.20 11.56 10.01 31.57 32.41

Thailand 7.32 8.38 11.46 10.43 11.91 13.31 13.25 12.73 15.48 16.17

Vietnam 0.00 0 0.49 0.8 1.63 2.27 0.76 0.4

Brunei Darussalam NA NA NA NA NA NA NA NA NA NA

Cambodia NA NA NA NA NA NA NA NA NA NA

People's Republic of China 4.22 5.39 8.14 23.73 30.39 29.35 26.36 22.44 33.25 32.46

Indonesia 0.70 2.24 28.53 16.91 13.57 13.58 13.52 10.79 10.95 11.44

Japan 51.59 63.14 79.16 145.53 178.97 195.56 200.08 218.85 194.54 200.4

Republic of Korea 8.56 14.15 20.73 44.23 39.66 43.05 46.97 44.81 47.86 49.47

Lao PDR NA NA NA NA NA NA NA NA NA NA

Malaysia 23.21 25.47 28.23 36.65 42.17 48.66 53.33 54.02 63.61 60.64

Myanmar 0.42 0.67 3.31 1.23 0.61 1.02 2.77 3.29 NA NA

Philippines 25.23 22.09 24.59 36.84 30.99 29.82 29.54 29.07 33.49 33.39

Singapore 13.34 15.44 23.90 37.27 43.92 46.93 44.37 45.40 50.03 52.64

Thailand 1.06 5.67 13.66 28.13 37.69 42.42 48.14 49.78 59.43 59.15

Vietnam NA NA 0.28 5.01 13.51 15.1 12.21 13.5 16.98 16.49

Private Bond Market Capitalization to GDP (%)

Public Bond Market Capitalization to GDP (%)

ASEAN+3 CAPITAL MARKET INFRASTRUCTURE




BRUNEI DARUSSALAM In order to manage its capital market, Brunei Darussalam Capital Markets:

(1) Securities Order of 2001 which had been amended in 2002 and 2005; and(2) Mutual Funds Order of 2001.

Both of them have been replaced with the Securities Market Order of 2013.

There is currently no stock exchange and self-regulatory organization in Brunei Darussalam. The capital markets of Brunei Darussalam are currently in the development stage .

The capital market infrastructure is still being established and there are plans to have linkages for cross-border cooperation especially with the ASEAN member countries.

Brunei has investment advisers, investment dealers, investment representatives, fund operators and banks as part of its capital market infrastructure. At the moment, there is only one company offering its stock publicly OTC. This is through a licensed dealer, and trading volume is very low.

Brunei has capital market intermediaries whose head offices are based in other ASEAN member countries. The intermediaries outsource some operations to their head offices.

CAMBODIATable: Financial Supervisory Infrastructure in Cambodia

Source: Naron (2007)

INDONESIAFigure: Financial Supervisory Infrastructure & Capital Market Structure In Indonesia

Source: Aziz (2013) Source: OJK (2013)

In the wake of 2008 global financial crisis, the Indonesia financial systems restructured by establishing the Financial Services Authority. The agency was newly established replacing the role of BAPEPAM-LK and part of the Central Bank of Indonesia’s duties. OJK is an autonomous institution which directly reports its duties to the parliament and is free from interference by other parties, with functions, duties, and authority to regulate, supervise, examine, and investigate financial services sector in Indonesia.

LAO PDRFigure: Financial Supervisory Infrastructure in Lao PDR

Source: Asian Development Bank (2012)

MALAYSIAFigure: Financial Supervisory Infrastructure in Malaysia

Source: Yunus (2007)

MYANMAR Myanmar Capital Market is still in the development stage.

Myanmar has a plan to open the capital market by 2015. To support the plan, Myanmar, led by the Minister for the Ministry of Finance and Revenue, organize Capital Market Development Committee on 1st July, 2008.

Myanmar also built Road Map for the development of capital market in accordance with the time frame for the effort to gain ASEAN integrated Capital Market. There are three phases to be implemented. The first phase has already been implemented from 2008 to 2009. The second phase is being implemented from 2010 to 2012 and the third phase will be implemented from 2013 to 2015.

The financial system in Myanmar remains one of the least developed in the world, with only under 10% of the population holding of a bank account and less than one citizen per 1000 active in the credit market. This lack of financial development happens due to a combination of high inflation, bank runs and insider lending and low capital bases.

The new Central Bank of Myanmar (CBM) Law was signed by the president, Thein Sein, on 11 July 2013. The legislation secures the bank’s autonomy and clarifies its responsibilities to regulate local banks, oversee the development of capital markets and manage the official foreign exchange reserves. Under this new law, the role of CBM Director will be upgraded to ministerial level to give more flexibility in conducting their business. Through this new law its clearly reflected that all kinds of financial activities in Myanmar are solely supervised by the CBM.

PHILIPPINES There are three agencies that supervise the different institutions in the Philippine financial

system. In addition to being the monetary authority, the Bangko Sentral ng Pilipinas (BSP) supervises banks and their financial allied subsidiaries and affiliates (except insurance companies), non-stock savings and loan associations, and pawnshops.

The Securities and Exchange Commission (SEC), on the other hand, has oversight on the domestic capital market and, as such, supervises self-regulatory organizations (SROs), investment houses, and securities dealers/brokers. It also supervises investment companies, finance companies and pre-need firms.

Finally, the Insurance Commission (IC) supervises insurance and reinsurance companies, insurance brokers, and mutual benefit associations.

In addition, the Philippine Deposit Insurance Corporation (PDIC) also shares some supervisory powers with BSP over banks consistent with its role as deposit insurer.

Regarding inter-institutions coordination for maintaining financial stability, in July 2004, the three financial supervisory agencies, together with the PDIC, formed the Financial Sector Forum (FSF). The FSF is essentially a cooperative effort without any specific legal authority, and thus it is not intended to function as an integrated supervisory body.

The key objectives for setting up the FSF include the improvement of the supervision of financial conglomerates and addressing the occurrence of firms operating in “regulatory grey areas”.

SINGAPORE Singapore has an integrated financial regulatory structure, under which the Monetary

Authority of Singapore (MAS) has the authority to regulate the banking, securities, futures, and insurance industries in the nation-state.

Figure: Financial Supervisory Infrastructure in Singapore

Source: The Group of Thirty (2007)

THAILANDFigure: Financial Supervisory Infrastructure in Thailand (Part 1)

Source: Thailand Ministry of Finance

THAILAND

Figure: Financial Supervisory Infrastructure in Thailand (Part 2)

Source: Thailand Ministry of Finance

VIETNAMFigure: Financial Supervisory Infrastructure in Vietnam

Source: Vietnam Bond Market Association

PEOPLE’S REPUBLIC OF CHINA China adopts a sector-based approach for its financial industry supervision, with securities,

banking and insurances sectors under separated supervision by the China Securities Regulatory Commission (CSRC), the China Banking Regulatory Commission (CBRC) and the China Insurance Regulatory Commission (CIRC) respectively, pursuant to applicable laws.

Figure: Financial Supervisory Infrastructure in People’s Republic of China


JAPAN The Japanese financial regulatory structure is characterized as an integrated approach led

by the Financial Services Agency (FSA), with the Ministry of Finance and the Bank of Japan continuing to retain an important role. Although the MOF’s supervisory role is limited as a result of the establishment of the FSA, it retains a strategic role within the crisis management council.

Figure: Financial Supervisory Infrastructure in Japan


SOUTH KOREA The Financial Supervisory Service (FSS) is South Korea integrated financial regulator that

examines and supervises financial institutions under the broad oversight of the Financial Service Commission (FSC), the government regulatory authority staffed by civil servants. Under the guidance from the FSC, the FSS conducts inspections of and supervision over financial institutions and then it also reports the results back to the FSC

Figure: Financial Supervisory Infrastructure in South Korea

Source: Yung (2007)

ASEAN+3 FINANCIAL MARKET PRODUCTS




ASEAN MEMBER FINANCIAL MARKET PRODUCTS (Part 1)

BRUNEI DARUSSALAMThe stock and bond markets are small and conducted OTC. In the stock market, there is only

one market player/financial institution offering over-the-counter purchases and selling of company stocks/shares. In the bond market, Brunei have government and corporate sukuk issuances. AMBD, on behalf of the government of Brunei Darussalam, is the main issuer for Brunei Government Short-term Sukuk al-Ijarah.

CAMBODIATwo types of securities that are able to be traded on CSX: Common Stock and Preferred Stock There are currently no such a modern or institutionalized stock in Cambodia Capital Market

INDONESIAEquities (Stock)Corporate Bonds: Bond issued by National Private Company, including BUMN and BUMD.Government Bonds: Bonds Issued by the Government including ORI and T-Bill.Corporate Sukuk: Fixed Income instruments are issued based on Sharia principles.Corporate Sukuk Revenue based on contract.State Sharia Securities/SBSN or Corporate Sukuk: Securities issued by the Government based

on ShariaAsset-Backed Securities (ABS): Debt Securities issued with underlying assets as the basis.

Derivatives issued in Indonesia include stock options and Index Future Contracts.

LAO PDRThere are two products offered in Laos’s capital market, which are stock and bonds. And there

are only two listed stocks in the market listed in LSX which are EDL Generation Public Company (EDL-Gen), and Banque Pour Le Commerce Exterieur Lao Public (BCEL).

On bonds, Laos issues three year Kip-denominated bonds and Baht-denominated bonds.The Government issues Treasury-bills on a regular basis to finance the country’s budget deficit.

MALAYSIAMalaysia financial market products comprise of: common stock, preferred stock, warrant,

mutual fund, and bonds.Other financial market product outside capital market product is Negotiable Instrument of

Deposit (NID). NID is an instrument issued by a banking institution certifying that a certain sum in MYR or Foreign Currency has been deposited with the issuing bank for a certain tenor at a specified rate of interest (coupon rate may be fixed, floating or zero).

While Short Term Corporate Placement (STCP) provides an alternative investment avenue for customers to place their excess funds with HLBB at a more flexible tenure as compared to fixed deposit

PHILIPPINESPhilippines’s instruments that traded in capital market are:Fixed Income Securities (Bonds, Mortgage Backed Securities, Asset Backed Securities) and

Variable Income Securities (Derivatives, Equities, FX Denominates)


SINGAPOREBond offerings with a lower minimum subscription size and tradable on the Singapore Stock

Exchange (SGX) are also available for the retail market. Singapore Exchange (SGX) is the preferred listing location of close to 800 companies. One of the

unique strengths of our equity capital markets is the large range of foreign listings on SGX. Singapore houses the major global FX dealers and offers a deep and liquid market for trading

and hedging of G3 currencies, as well as emerging market currencies. At derivative market, the products can be split into two: that for exchange-traded derivatives and that for over-the-counter derivatives.

THAILANDThere are 4 types of products in foreign exchange market, but the most popular in Thailand is

foreign exchange swap since it has relation with other short-term instruments.The Thailand structured of bonds can be categorized into two groups: structured notes and

securitization bonds. Most of the structured notes in Thailand are issued by commercial banks and are mainly Equity-Linked Notes (ELN).

Other financial markets include: Repo transaction, Treasury Bills, Private Repurchase Operations, Bilateral Repurchase Operations, and Futures.

VIETNAMSimilar to other countries, the main capital market product from Vietnam stock exchange

comes from stocks and bonds of companies being traded in the market.In Vietnam, the most derivatives such as options and future contracts are hold on off-exchange

trading.


JAPANJapanese Bonds are classified into the following categories:Japanese government bonds: JGB;Local government bonds (prefectures, municipalities (cities, towns and villages)Government agency bondsLocal public corporation bonds Local governments agency bond Corporate bonds Bank debentures, and Non-resident bonds (foreign bonds)

Other financial products includes: Call money market, Repo market, Commercial Money Market and Derivative Market.

SOUTH KOREABonds in Korea Republic could be classified into two kinds, they are: government bond and

corporate bond. While derivatives products in South Korea include: Stock Index Products: KOSPI 200 Futures,

KOSPI 200 Options, STAR Futures.Individual Equity Products: Individual Equity Futures, Individual Equity Options, Interest Rate

Products: 3 Year Korea Treasury Bond Futures (KTB3), 5 Year Korea Treasury Bond Futures(KTB5), 10 Year Korea Treasury Bond Futures(KTB10), MSB Futures.

Currency Products: USD Futures, USD Options, Japanese Yen Futures, Euro Futures.Commodity Products: Gold Futures, Lean Hog Futures

ASEAN+3 (APT) FINANCIAL MARKET PRODUCTS

ASEAN+3 SWOT ANALYSIS ON CAPITAL

MARKET




STRENGTH (S) ANALYSIS

STRENGTH:

•There are great efforts and awareness by all member countries to develop their capital markets;•There have been strong willingness by member countries to embark on capital market cooperation for the last decade.•Mobility of funds and professionals have been extensive for the last decade;•ASEAN countries’ economic growth has been robust and sturdy in the wake of the Asian crisis of 1998.

WEAKNESSES (W) ANALYSISWEAKNESSES:

•There are sheer differences among countries in the ASEAN+3 region pertaining to political system, economic development, and sosio-cultural ambience;•There are, unfortunately, still inequalities among countries in the ASEAN+3 region with regard to capital market development, readiness of infrastructure, and the quality of human capital if the capital markets are to be harmonized and integrated;•Current circumstances indicate that member countries have enacted and administered so much diverse regulations and regulators. Moreover, law enforcement is of various degrees in the ASEAN+3 region;•Traditionally, risk appetite of the region’s society is relatively low;•Citizens are more inclined to save in the banking system rather than invest in capital market products.

OPPORTUNITIES (O) ANALYSISOPPORTUNITIES:

•The realization of the ASEAN Economic Community (AEC) in 2015 will manifest in a huge ASEAN market. This would be enormous opportunities for capital market participants with respect to portfolio diversification, market expansion, and capital movement;•Economists and business community deem the 21st century as the Asian awakening era, indicating that the shift in capital flows will be (and actually have been) magnificent to the Asian region;•Continuing the second opportunity argument above, potential capital sources from outside the ASEAN+3 region are very lucrative and readily available, especially in the wake of the European market debacle.

THREATS (T) ANALYSISTHREATS:

•There have been historically volatilities in financial markets in the ASEAN+3 region, which might endanger the stability and sustainability of the region’s financial systems;•The fear for contagion effect from other regions that are experiencing financial crisis is always prevalent;•Tapering by the U.S. Federal Reserve has reduced capital inflows into the ASEAN markets;•The risk of financial instability and crisis is still intact due to the still-to-be-enhanced political and economic foundations of the ASEAN+3 countries;•The fledgling ASEAN+3 integrated capital markets will be competing with other economic communities and integrated capital markets. For instance, competitive pressure will come from the NYSE-Euronext in relation to capital attractiveness.

ASEAN+3 FINAL REPORT CONCLUSION




REPORT CONCLUSION (Part 1)All countries in the ASEAN+3 regions have made effort to develop their capital markets to be ready for the capital market integration.

The robust effort includes the development of infrastructure, regulations, investor protection, and information and disclosure requirements.

Nevertheless, some countries such as Cambodia, Myanmar, Lao, and Vietnam that are the least developed capital markets seem less ready for market integration.

As a consequence, they need support, not only from countries cooperating with them, but also from market participants in their own countries.

For instance, the few number of firms listed in Cambodia are still a hindrance to the countries’ capital market development.

REPORT CONCLUSION (Part 2)The integration among the ASEAN+3 countries is still very possible but requires additional work and effort.

In short and medium terms, the region has to address the issues of sufficient capital market infrastructure, comparable capital market products, and high calibre capital market professionals in the region.

In the long run, if the equal and leading development of infrastructure has been attained, capital market integration in the region is on the way to be capitalized on.

THANK YOU!FINAL REPORT: SWOT ANALYSIS ON THE

CAPITAL MARKET INFRASTRUCTURE IN THE ASEAN+3 COUNTRIES AND ITS POLICY

IMPLICATIONS




APPENDIX ASEAN+3 COMPREHENSIVE

SWOT ANALYSIS




BRUNEI DARUSSALAMFigure: Brunei Darussalam Capital Market SWOT

CAMBODIA

Figure: Cambodia Capital Market SWOT

INDONESIA

Figure: Indonesia Capital Market SWOT

LAO PDR

Figure: Lao PDR Capital Market SWOT

MALAYSIA

Figure: Malaysia Capital Market SWOT

MYANMAR

Figure: Myanmar Capital Market SWOT

PHILIPPINESFigure: Philippines Capital Market SWOT

SINGAPORE

Figure: Singapore Capital Market SWOT

THAILANDFigure: Thailand Capital Market SWOT

VIETNAM

Figure: Vietnam Capital Market SWOT

JAPAN

Figure: Japan Capital Market SWOT

PEOPLE’S REPUBLIC OF CHINA

Figure: People’s Republic of China Capital Market SWOT

SOUTH KOREA

Figure: South Korea Capital Market SWOT

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Asean+3 capital market swot analysis