What is ASEAN Finance and Banking 2005?

This new century finds the Association of South East Asian Nations, or ASEAN, approaching a critical juncture in the development of financial markets. Through interviews with key figures in the region, we will produce an in-depth analysis and high-profile report on difficult challenges and growth prognosis, investment and development of financial services. The report will cover banking, capital markets, insurance, Islamic finance, and export financing. At the heart of this report will be insights from industry leaders in ASEAN, primarily from six of its member nations:— Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand.

Six years after a debilitating financial crisis, clear progress in restructuring and recovery for regional financial and banking industries is paving the way for prosperity once more in Southeast Asia. The ASEAN region is entering a high-growth period; the region as a whole expanded by nearly 6 percent in 2004, with individual economies recording as much as 7.8 percent GDP growth. Foreign influx might reach $24 billion this year, with a higher share going toward services, such as finance, transport, information technology and telecommunications. By 2010, the ASEAN market could have a combined GDP of $1 trillion. This time, however, this prognosis of optimism and enthusiasm comes with significant caveats, as regional players are all too aware that the international community first needs to be convinced that lessons have been learned with regards to risk management, debt allocation and corporate governance.

The report will focus on these key issues in a multi-part series of special reports on the state of the financial industry in ASEAN and six of its selected member nations. Taking into consideration the American public's views on Southeast Asia, we will discuss strategies and policies being implemented to raise standards in risk management in banks and other financial institutions. Important players are concentrating their efforts on improving the financial environment and regulatory underpinnings. These players include the Asian Development Bank, the U.S.-ASEAN Business Council’s Financial Service Working Group, the ASEAN Bankers Association, and the South East Asian Central Banks (SEACEN) Research and Training Center.

Retail banking: from cash to cards

As consumers make the move from cash to cards perhaps the most surprising development is the rising popularity of purchase-hire options, typically known as lease agreementsin the U.S. The Asian variant seems to be far more interesting. Firstly, finance companies are discovering that hire-purchase cards can function as lines of credit for consumers who are not affluent enough to qualify for regular credit cards. Secondly, hire-purchase options are popular with all kinds of consumers, who increasingly use this type of financing to pay for non-traditional items, such as cellular phones and college tuition.

In Thailand alone, 4.2 million credit cards have been issued, or more than one for every five households, and credit card spending is rising at a rate of 27 percent per year. American companies, such as Citibank, seem to be at the forefront of this unfolding trend. The giant U.S. bank has emerged as the biggest credit card issuer in Malaysia, Indonesia and the Philippines.

Critics of credit card expansion can take heart: financial industry leaders, wary of escalating consumer debt, are moving quickly to establish consumer credit rating systems and other cautionary measures. Innovative watchdog measures are being implemented. For instance, the Bank of Thailand is carefully watching credit card expansion. The Bank has imposed a maximum interest rate of 18 percent on credit cards, raised the minimum qualifying income to $4,500 per year, and is backing pioneering legislation to win supervisory rights over private finance companies, such as GE Consumer Finance and Capital OK. While these measures might be modified to address corporate concerns about consumer privacy, it is clear that Southeast Asians have entered the credit era. Despite a relatively high rate of savings in the region, the market has already shown that the people of Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand are willing to take on debt for what the industry calls 'critical personal investments'. These include cars and motorcycles, on which people depend for their livelihoods, as well as education opportunities for children and housing for families.

An intriguing aspect of the ASEAN retail banking market is the potential for profitability. Southeast Asian consumers are generally considered to be excellent credit risk takers, since their debts represent major investments in their livelihoods. And consumers are willing to pay higher interest rates than elsewhere in the world. American banks stand in good stead in the region, with major players such as Citigroup and GE Capital having established themselvees in the region before the financial crisis. During the crisis, these American financial institutions built on their good name, providing legitimate credit during troubled times, thereby generating considerable brand loyalty in ASEAN countries.

While the sky may seem the limit for retail banking, serious challenges must be faced. Despite technological sophistication, ASEAN markets often lack traditional credit scoring methods, forcing foreign lenders to establish their own credit models, which can differ from company to company. Another challenge involves payment and settlement systems, which can be complex and inefficient. This problem is not easily resolved, however, for opinions differ about who should foot the bill (the state or the private sector) for investments in cutting-edge processing technologies. The good news, though, is that studies to develop the best system for the region are ongoing. The South East Asian Central Banks Research and Training Center (SEACEN) recommends that payment systems be made convenient for the consumer and efficient for the economy, perhaps through an automated clearinghouse system such as the type adopted by France in 2000.

Towards an integrated ASEAN bond market

Healthy and stable ASEAN bond markets are needed to energize equity market expansion and improve the ability of governments to impose monetary policies.
Government and private sector leaders are hopeful that a pan-Asian bond market will break down trade and investment barriers in the region.
What’s more, if a pan-ASEAN bond market is established, the bloc will be much closer to realizing the proposed ASEAN Single Market Economy.

With exports surging on the back of strong growth in China, many central banks in the ASEAN region are sitting on large foreign exchange reserves. Analysts say these reserves should be used to improve the quality of regional bond markets. The Governor of the Bank of Korea, for example, has suggested that ASEAN countries should transform export surpluses into long-term investments. Instead of putting money into offshore international banks, where countries often borrow back the funds to pay for development projects, ASEAN nations should establish their own local finance mechanisms.

The combined size of the Malaysian, Indonesian, Philippine and Singaporean corporate bond markets was just $370 billion in 2003. Regional institutions, such as the Asian Development Bank (ADB) are working to ensure that ASEAN bond markets will become much bigger and more integrated. To much fanfare, the ADB launched its first-ever Malaysian ringgit bond offering. The $105 million issue was quite popular among Malaysian institutional investors, banks, insurance companies and pension funds, with bids totaling $684 million, or 6.5 times the issue amount. Citigroup and Malaysia’s AmMerchant Bank Bhd arranged the issue locally. The bond offering marked Malaysia’s first issue by a foreign entity, and it was the only supranational bond issue rated AAA by Fitch Ratings, Moody's Investors Service, and Standard & Poor's. The ringgit bonds are widely expected to improve liquidity in currency swap markets in the ASEAN region. In the spirit of opening other regional capital markets, the ADB will issue bonds in other Asian currencies, such as renminbi, rupiah and baht.

But some experts charge that the ADB’s ringgit bond offering does not go far enough to convince investors that ASEAN markets, governments and banks possess sufficient expertise to manage risk adequately. These critics say that, by offering ringgit bonds, the ADB is essentially minimizing the risk for investors who lack confidence to invest directly.

The ability of ASEAN financial leaders to counter these criticisms with straightforward strides in bond market development will be the real test of investor confidence. The world will be watching, and some believe that the clock is ticking very loudly. According to Hong Kong’s Asian Institute of International Financial Law, shallow Asian bond markets could leave the region vulnerable to a repeat of the 1997 financial crisis. The institute suggested the creation of a regional regulation authority to support credit risk transfer, as well as a reduction in legal barriers that impede the establishment of a pan-Asian bond market.

New markets for export finance and insurance

Financial markets are becoming more sophisticated, as new avenues are opened for export financing. Local-currency financing in particular is garnering more attention and respect. The export engines of Southeast Asia are firing on all cylinders, a testament to the profound influence of a red-hot Chinese economy. Demand from the United States also runs strong, despite fears of a weakening economy. As momentum in international trade mounts, it is clear that companies will require more avenues for risk insurance and trade financing. It is becoming easier to acquire political risk insurance, do business in local currencies, and explore fresh options for trade financing.

As more exporters based in Southeast Asia require trade financing, the insurance market is more willing to meet the increasing demands. Creative options, such as securitization of accounts receivables risk through trade credit insurance, are dynamic areas of growth and expansion for insurance providers. Observers also note local banks, and even international banks with local operations in ASEAN, are being tapped to provide local-currency financing. This trend is expected to accelerate as more money heads toward country pension funds, life insurance and other financial avenues.

The importance of local-currency financing should not be underestimated, especially in today’s financial environment, where doubts about the stability of the American dollar reign supreme. However, the flip side is that interest rates in local currencies are more vulnerable to uncontrolled escalation in the wake of financial crisis; one observer pointed to the incidence of short-term interest rates over 40 percent in post-crisis Indonesia.

It is clear that insurers today perceive the ASEAN region to be less risky. Insurers are stepping up with real long-term political risk insurance. In some areas, 10-year coverage for investments or bonds can be purchased. This is a significant improvement from the post-crisis mentality, when most insurers were only willing to cover such investments for up to three years. The 10-year duration in coverage is evocative of pre-crisis standards and its return is a positive reflection on the state of ASEAN economies.