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Thailand: Selected Issues

Author(s):
International Monetary Fund. Asia and Pacific Dept
Published Date:
June 2018
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Thailand: Implications of Regional Financial Integration1

Despite substantial progress in regional integration in recent years, financial integration in ASEAN has yet to catch up. Our analysis finds that improving regulatory and institutional quality and reducing restrictions on capital flows can promote regional financial integration. The empirical evidence also suggests that regional financial integration can help ASEAN better weather global shocks, foster economic rebalancing, and achieve higher economic growth. Financial integration, however, pose challenges and risks. A gradual approach would therefore be appropriate for promoting regional financial integration.

A. Introduction

1. Recent years have witnessed substantial progress in regional economic integration among the ASEAN-5, and more broadly among all ASEAN economies. As a major milestone on the integration agenda, the ASEAN Economic Community (AEC) came into being in 2015. The AEC Blueprint had been the key vehicle for achieving the free flow of goods, services, investment, and skilled labor, as well as a freer flow of capital within the region. Its successful implementation led to the creation of the AEC five years earlier than the initially planned date of 2020. A successor blueprint, AEC Blueprint 2025, lays out a 10-year vision for regional economic integration.

2. Financial integration is a critical component of this broader regional economic integration agenda. Recognizing that financial integration complements trade flows, in 2011 ASEAN leaders adopted a financial integration framework, envisaging a more integrated financial region by 2020. Subsequently, in the AEC Blueprint 2025, the leaders have outlined the move toward financial liberalization and freer capital flow for the next decade.

3. Against this background, this paper addresses three questions: (i) What is the current status of financial integration in ASEAN-5? (ii) What are the key drivers of financial integration? and (iii) What are the benefits and costs?

4. This paper is structured as follows. After the second section takes stock of the current status of financial integration in ASEAN-5, the third section analyzes the drivers of financial integration based on a financial gravity model. The fourth section explores the benefits of financial integration. The closing section draws conclusions and policy implications for Thailand.

B. Current State of Regional Financial Integration

5. ASEAN-5 economies are increasingly integrated in trade, both globally and regionally. Global trade integration in these economies, measured by the ratio of total trade to regional GDP, reached 76 percent in 2016 (panel 1 of Figure 1). In fact, trade openness in this region is already higher than the average in advanced economies and other Asian countries. A closer look shows that the ASEAN-5 economies’ trade with each other accounted for a large share of their total trade. In 2015, about 60 percent of trade in ASEAN-5 was transacted within ASEAN Plus Three economies (panel 2 of Figure 1).2 Intraregional trade has benefited from trade liberalization across the region (almost all goods in the region are now traded at zero tariff) and from participation in global value chains.

Figure 1.Trade Integration in ASEAN

6. Financial integration in ASEAN-5 has also risen, partly driven by trade. Figure 2 shows that ASEAN-5’s overall financial integration, measured by the sum of cross-border asset and liability holdings, is quite high, lagging behind only Europe. But if financial centers such as Singapore are excluded from the sample, the overall financial integration level for the rest of the ASEAN-5 countries ranks quite low, lagging all regions except Latin America.

Figure 2.International Investment Position

(Sum of assets and liabilities, percent of regional GDP, financial centers included)

Sources: IMF, Balance of Payments Statistics (BOPS); and IMF staff calculations.

Note: Asia-other = Australia, China, Hong Kong SAR, India, Japan, Korea, New Zealand, and Taiwan Province of China; Latin-4=Argentina, Brazil, Chile, Colombia; NAFTA = North American Free Trade Agreement (Canada, Mexico, United States).

7. Given lack of data to track all financial flows, financial integration is examined based on data from portfolio flows. Data from bank flows are used as a robustness check.3 Although foreign direct investment still dominates trade-driven financial flows, the portfolio investment position has experienced an upward trend since the Asian financial crisis, despite setbacks during 2008 (panel 1 of Figure 3). The share of bank borrowing of ASEAN-5 economies has also grown, with intraregional bank borrowing growing especially fast since the global financial crisis (panel 2 of Figure 3).

Figure 3.Financial Integration in ASEAN

8. Portfolio investment has become increasingly important over the years, as reflected in its increasing share in the total international investment position (Figure 4). Portfolio investment accounted for more than 20 percent of the total international investment position as of 2016, up from 12 percent in 2001. Excluding Singapore, whose banking position is especially large, the share of portfolio investment has exceeded the share of other investment, and was below only the share of foreign direct investment.

Figure 4.ASEAN: International Investment Position

9. However, the degree and pace of financial integration in ASEAN are not commensurate with those of trade integration. This discrepancy can be illustrated by comparing the intensity scores for trade and portfolio investment.4 Trade intensity of the ASEAN-5 economies during 2001–2015 was higher than all other regions (panel 1 of Figure 5). In contrast, their portfolio investment intensity was lower than the world average, and in fact was only about one-third of their trade intensity (panel 2 of Figure 6).

Figure 5.Trade and Financial Intensity

Sources: IMF, Direction of Trade Statistics (DOTS); IMF, Coordinated Portfolio Investment Survey (CPIS); and IMF staff calculations.

Note: Asia-other=Australia, China, Hong Kong SAR, India, Japan, Korea, New Zealand, and Taiwan Province of China; Latin America= Argentina, Brazil, Chile, Colombia; NAFTA = North American Free Trade Agreement (Canada, Mexico, United States).

Figure 6.Portfolio Investment in ASEAN

10. Financial integration in ASEAN-5 is lagging when using other metrics. Although the portfolio investment position (sum of assets and liabilities) was about 60 percent of GDP in 2015, this ratio would drop to about 20 percent if Singapore were excluded, which is much lower than Europe or NAFTA (panel 1 of Figure 6)., The share of intraregional portfolio investment is also relatively low in the ASEAN-5 economies if portfolio asset composition is considered (panel 2 of Figure 6).

C. Drivers of Regional Financial Integration

11. The drivers of financial integration in ASEAN are examined using a financial gravity model based on cross-border portfolio investment.5 In addition to standard gravity factors, the model analyzes the role of regulatory and institutional quality as well as capital controls measures.6 Empirical evidence suggests that lower regulatory and institutional quality, as well as restrictions on cross-border capital flows, negatively affect regional financial integration.7

12. Gravity models of trade predict that bilateral trade flows will be proportional to market size and inversely proportional to distance between trading partners. The gravity relationship arises when trade costs and barriers increase with distance. Similarly, gravity models of asset trade (e.g., Portes and Rey 2001) show that distance, which proxies for information asymmetry, has a negative impact on bilateral asset trade flows. Countries with geographic proximity usually have more knowledge and a better understanding of each other due to the ease of interaction; this is especially important for information-intensive financial investment.

13. The baseline gravity equation includes indicators for market size and information asymmetry. Two additional variables, bilateral trade volume and a common language indicator, are used as a proxy for information asymmetry. The analysis is based on a panel of 45 economies from 1990 to 2015, consisting of ASEAN economies together with representative advanced and emerging market economies. The estimates point to the following findings (Table 1):8

  • Bilateral financial integration increases with trade integration. The trade coefficient shows that when bilateral trade volume increases by 10 percent, financial holdings increase by more than 4 percent. The results are especially strong for banking position. These findings are consistent with the stylized facts discussed in the previous section: financial integration has gone hand in hand with trade integration.

  • Financial integration increases with market size and common language ties. Larger market size leads to higher demand for assets and higher asset prices and, in turn, to a greater number of endogenous assets. Estimates also suggest that closer language ties lower transaction costs and foster integration.

  • Financial integration decreases with distance between countries. Countries with geographical proximity tend to be more integrated financially.

Table 1.Thailand: Baseline Gravity Model
−1 Portfolio Assets−2 Portfolio Assets and Liabilities
GDP Borrower[1]0.83***

−0.07
0.77***

−0.07
GDP Lender[2]0.11

−0.09
0.70***

−0.08
Distance−0.51***

−0.03
−0.39***

−0.02
Trade0.45***

−0.02
0.42***

−0.02
Common Language0.19***

−0.04
0.28***

−0.04
Constant−12.35***

−3.23
−19.95***

−2.69
Year EffectYesYes
Borrower EffectYesYes
Lender EffectYesYes
Observations18,55417,732
Adjusted R20.8250.83
Source: Authors’ calculations.Note: Standard errors in parentheses.*p < 0.10, **p < 0.05, ***p < 0.01
Source: Authors’ calculations.Note: Standard errors in parentheses.*p < 0.10, **p < 0.05, ***p < 0.01

14. The results suggest that institutional quality matters for regional financial integration. To examine the role of institutional quality, a wide range of institutional indicators are added to the baseline gravity model. They include governance quality, ease of doing business, and political, economic, and financial risks. The coefficients of all indicators are found to be positive and statistically significant, indicating that good institutional quality, including good governance and a business-friendly environment, is linked to greater financial integration (Table 2).

Table 2.Thailand: Drivers of Financial Integration: Institutional Quality
(1) Portfolio Assets(2) Portfolio Assets and Liabilities
GDP Borrower0.78***

(0.02)
0.83***

(0.02)
GDP Lender0.69***

(0.02)
0.80***

(0.02)
Distance−0.88***

(0.02)
−0.89***

(0.02)
Trade0.05**

(0.02)
−0.03

(0.02)
Common Language0.94***

(0.05)
0.97***

(0.04)
Rule of Law Borrower0.86***

(0.02)
1.53***

(0.02)
Intra-ASEAN Dummy11.14***

(0.12)
0.85***

(0.11)
Intra-ASEAN Dummy × Rule of Law Borrower20.42***

(0.10)
0.71***

(0.10)
Rule of Law Lender2.49***

(0.03)
1.47***

(0.02)
Intra-ASEAN Dummy × Rule of Law Lender−0.02

(0.11)
0.52***

(0.10)
Constant−17.09***

(0.67)
−18.01***

(0.59)
Year EffectsYesYes
Observations15,78815,491
Adjusted R20.6360.662
Source: Authors’ calculations.Note: Standard errors in parentheses.

Intra-ASEAN dummy equals one when the investment is between ASEAN member countries, zero otherwise.

Interaction term of the intra-ASEAN dummy and the rule-of-law index in the investment-receiving country.

*p < 0.10, **p < 0.05, ***p < 0.01
Source: Authors’ calculations.Note: Standard errors in parentheses.

Intra-ASEAN dummy equals one when the investment is between ASEAN member countries, zero otherwise.

Interaction term of the intra-ASEAN dummy and the rule-of-law index in the investment-receiving country.

*p < 0.10, **p < 0.05, ***p < 0.01

15. Improvements in institutional quality further promote regional financial integration. Figure 7 shows the positive relationship between the rule-of-law index,9 as a proxy for institutional quality, and intra-ASEAN financial integration. A reasonable explanation is that, while global investors are likely to have broader and stable relationships with high-quality clients, regional investors are more vulnerable to poor institutions, and thus benefit more from an improvement in institutional quality. It should be noted, however, that the results for ASEAN-5 economies show a high degree of heterogeneity. The positive effect of the rule-of-law index appears most significant for Thailand, the Philippines, and Singapore.

Figure 7.Institutional Quality and Intra-Regional Financial Integration ASEAN-5

(Average)

Sources: The World Bank, Worldwide Governance Indicators (WGI); IMF, Coordinated Portfolio Investment Survey (CPIS); and IMF staff calculations.

16. Finally, restrictions on capital flows undermine financial integration. When the baseline gravity model is augmented with capital controls measures from Fernández and others (2015), estimates show that in both equity and debt securities markets, controls restricting nonresidents’ purchase of domestic securities or restricting residents’ purchase of foreign securities have a significant negative impact on portfolio investment. These results confirm that capital controls are a barrier to trade in financial assets, similar to tariffs and quotas that impede trade in goods and services. Therefore, with continuing efforts toward gradually liberalizing capital accounts, financial integration of ASEAN economies is set to further improve.

D. The Benefits of Regional Financial Integration

17. There are several potential advantages to financial integration, including consumption smoothing, risk sharing, and risk diversification. Regional financial integration could have extra benefits. Better economies of scale would make financial systems within the region more efficient. By growing and deepening local financial markets, financial integration helps develop a “twin engine” financial system and reduces excessive reliance on banks in a bank-centric system. Regional financial integration can also help alleviate countries’ reliance on financial centers; this funding diversification is shown to have a buffering effect against global shocks such as the taper tantrum (Park and Shin 2016). Moreover, regional financial integration provides incentives for regional cooperation and enhancement of multilateral safety nets (Kim, Lee, and Shin 2006; Park and Shin, 2016).

Regional Investment and Global Liquidity Conditions

18. Regional financial integration would help ASEAN countries better weather external shocks and spillovers. This was particularly propitious when banks in advanced economies, weakened by the global financial crisis and constrained by tighter financial regulations, began retreating to their home bases. Based on different approaches, results suggest the following:10

  • The investment position within the ASEAN Plus Three economies was less affected by liquidity conditions in the United States.11 This finding is based on using U.S. security broker-dealer sector leverage as an indicator for the U.S. liquidity cycle (Table 3).12 Change in Europe’s M2 for the European liquidity cycle produce similar results.

  • Regional investors were less likely to join global investors in pulling out of investments during the global financial crisis (Figure 8).

  • The magnitude of global investors’ retreat was proportional to the global financial integration level, measured by the ratio of total cross-border portfolio investment to GDP. The breakdown between ASEAN Plus Three investors and global investors shows that, in most cases, investment from regional investors exhibited less volatility in both absolute and relative terms.13

Table 3.Thailand: Benefits of Financial Integration: U.S. Liquidity Condition
(1) Portfolio Assets(2) Portfolio Assets and Liabilities
GDP Borrower0.31***

(0.09)
0.17*

(0.09)
GDP Lender−0.03

(0.10)
0.25***

(0.09)
Distance−0.47***

(0.03)
−0.34***

(0.02)
Trade0.43***

(0.02)
0.40***

(0.02)
Real per Capita GDP Borrower1.55***

(0.19)
1.26***

(0.19)
Real per Capita GDP Lender0.78***

(0.22)
1.06***

(0.21)
Common Language0.23***

(0.04)
0.33***

(0.04)
US Broker-Dealer Sector Leverage0.35***

(0.06)
0.16***

(0.05)
Intra-ASEAN+3 Dummy3.46***

(0.74)
3.23***

(0.67)
Intra-ASEAN+3 Dummy × US Broker-Dealer Sector Leverage−0.93***

(0.24)
−0.82***

(0.22)
Constant−14.23***

(1.51)
−20.05***

(1.32)
Borrower EffectYesYes
Lender EffectYesYes
Observations18,55417,732
Adjusted R20.8250.830
Source: Authors’ calculations.Note: Standard errors in parentheses.* p < 0.10, ** p < 0.05, *** p < 0.01
Source: Authors’ calculations.Note: Standard errors in parentheses.* p < 0.10, ** p < 0.05, *** p < 0.01

Figure 8.ASEAN–5: Change of Portfolio Inflows, 2008

Sources: IMF, Coordinated Portfolio Investment Survey (CPIS); and IMF staff calculations.

Note: ASEAN Plus Three = ASEAN–5 plus China, Japan, and Korea.

Financial Integration and Rebalancing

19. Regional financial integration can also play an important role in facilitating external rebalancing. ASEAN economies are salient examples of the Lucas paradox (Lucas 1990). Despite substantial development potential and large infrastructure needs, these economies were all net capital exporters with high current account surpluses, averaging about 2 percent of GDP per year during 2009–16.

20. The current account imbalance is affected by structural factors. The current account imbalance a mirror image of the savings-investment gap; the desirable savings-to-investment level, which in turn, is affected by structural factors that are determined or influenced by the financial system.14 Financial integration can play a key role in affecting such levels. It would lessen the need to rely on countries’ own funds and improve access to financial services, and thus provide a net boost to consumption and investment.

21. Regional financial integration can facilitate financing of investment.15 We estimate a model based on macroeconomic balance approach (similar to Pongsaparn and Unteroberdoerster, 2011).16 The impact of rebalancing is assessed through the change in the current account balance to GDP (the dependent variable). Our results show that deeper financial integration, either global or regional, is associated with lower current account surpluses (Table 4).17 These findings are in line with those of Pongsaparn and Unteroberdoerster (2011), who show that relative to their regional peers, Indonesia, Malaysia, and Thailand would be able to rebalance in a more significant way by moving toward a level of financial integration more consistent with their fundamentals.

Table 4.Thailand: Benefits of Financial Integration: Rebalancing
(1) Global(2) Regional(2) Both
Dependency Ratio0.32***

(0.10)
0.33***

(0.10)
0.33***

(0.10)
Fiscal Balance−0.09

(0.05)
−0.09*

(0.05)
−0.09*

(0.05)
Real GDP Growth0.05

(0.07)
0.05

(0.07)
0.05

(0.07)
Global Financial Integration−2.77***

(0.72)
−0.84

(2.12)
Opening Balance of Net Foreign Assets−0.00**

(0.00)
−0.00**

(0.00)
−0.00**

(0.00)
Population Growth0.02

(0.57)
0.09

(0.55)
0.07

(0.56)
Oil Income0.96***

(0.20)
0.97***

(0.20)
0.97***

(0.20)
Regional Financial Integration−2.95***

(0.71)
−2.15

(2.16)
Constant−1.35

(5.04)
−6.39

(5.39)
−4.48

(5.91)
Year EffectYesYesYes
Lender EffectYesYesYes
Observations597597597
Adjusted R20.9080.9090.908
Source: Authors’ calculations.Note: Standard errors in parentheses.*p < 0.10, **p < 0.05, ***p < 0.01
Source: Authors’ calculations.Note: Standard errors in parentheses.*p < 0.10, **p < 0.05, ***p < 0.01

Financial Integration and Economic Growth

22. The potential costs of financial integration should not obscure the potential benefits. To quantify the overall effect of financial integration, we look into the relationship between financial integration and economic growth, applying the framework of Eyraud, Singh, and Sutton (2017). We include standard control variables such as trade openness and population growth in our regression, with real GDP growth as the dependent variable. Considering financial integration might be affected by economic growth, we use instrumental variables (IV) methods as well. The instruments used are one-period lag of the financial integration variable and capital control measures from Fernández and others (2015).

23. Table 5 shows the regression results.18 Columns (1)–(3) evaluate the effect of global financial integration, and columns (4)–(6) show the results for intraregional financial integration. Columns (1) and (4) use ordinary least squares estimation with time fixed effects. To correct for possible endogeneity, columns (2) and (5) use two-stage least squares estimation and columns (3) and (6) use the instrumental variable–generalized method of moments method. The instruments used are one-period lag of the financial integration variable and capital control measures from Fernández and others (2015).

Table 5.Thailand: Benefits of Financial Integration: Economic Growth
(1)(2)(3)(4)(5)(6)
Trade Openness−0.79

(0.72)
−1.14*

(0.66)
−1.17

(0.83)
−1.03

(0.76)
−0.69

(0.58)
−0.99

(0.76)
Real GDP per Capita−2.39***

(0.44)
−1.99***

(0.41)
−2.12***

(0.46)
−2.53***

(0.48)
−1.23***

(0.41)
−1.53***

(0.47)
GDP Share of Investment−0.11

(1.00)
1.63

(1.01)
1.39

(1.04)
−0.42

(1.02)
1.73*

(1.05)
1.64

(1.06)
GDP Share of Government Spending3.00**

(1.20)
3.75***

(1.02)
3.72***

(1.29)
3.07**

(1.25)
2.70**

(1.06)
3.00**

(1.21)
Population Growth0.51

(0.60)
0.42

(0.59)
0.69

(0.63)
0.16

(0.61)
0.56

(0.55)
0.69

(0.61)
Inflation Rate0.10***

(0.03)
0.16**

(0.05)
0.17***

(0.05)
0.11***

(0.03)
0.16***

(0.06)
0.18***

(0.05)
Political Risk Index0.04

(0.05)
0.04

(0.05)
0.04

(0.05)
0.07

(0.05)
0.05

(0.04)
0.06

(0.05)
Global Financial Integration0.09

(0.10)
0.32**

(0.13)
0.31**

(0.15)
Regional Financial Integration0.13

(0.12)
0.06

(0.14)
0.11

(0.14)
Constant27.63***

(4.58)
28.04***

(4.00)
28.34***

(4.67)
28.95***

(5.22)
19.49***

(5.12)
21.54***

(5.11)
Year EffectYesNoNoYesNoNo
Observations988484917474
Adjusted R20.6090.4400.4470.5900.2800.288
Source: Authors’ calculations.Note: Standard errors in parentheses.* p < 0.10, ** p < 0.05, *** p < 0.01
Source: Authors’ calculations.Note: Standard errors in parentheses.* p < 0.10, ** p < 0.05, *** p < 0.01

24. Our results show a positive and significant association between global financial integration and economic growth.19 In similar estimations for regional integration, a positive but statistically weaker association is found between regional financial integration and economic growth. However, financial integration does not necessarily guarantee net benefits if sound institutional and policy frameworks are not in place.20

E. Conclusion and Policy Implications

25. Financial integration of ASEAN economies is an important component of financial development. This paper shows that regional financial integration in ASEAN economies not only lags their trade integration, but also lags behind financial integration in countries outside the region. When looking into the drivers of financial integration, the analysis finds that improving regulatory and institutional quality and reducing restrictions on capital flows can promote regional financial integration. The paper also provides empirical evidence that regional financial integration helps ASEAN better weather global shocks, fosters economic rebalancing, and is associated with higher economic growth. 21

26. It is important to recognize that financial integration and greater exposure to international capital markets can also pose challenges and risks. Capital flows, including those intermediated through the banking system, can amplify domestic economic and financial cycles. Cost of contagion would be greater in countries that are more financially integrated with a country where the financial shock originally is from. Harnessing the benefit of financial integration hence requires strong policy frameworks and institutions to safeguard macroeconomic and financial stability.

27. Macroeconomic policies, including exchange rate flexibility, need to play a key role in the management of risks associated with capital flows. A flexible exchange rate can be a critical shock absorber in the event of capital inflow surges. Macroprudential policies, in support of sound macroeconomic policies and strong financial supervision and regulation, can increase countries’ resilience to external shocks associated with capital flows, helping contain the buildup of systemic vulnerabilities over time (IMF 2012; 2017).

28. When advancing financial integration, close attention must be paid to financial stability. The opening up of financial markets requires, in the first place, strengthening domestic financial systems and improving macroeconomic fundamentals and, at the regional level, enhancing information sharing, improving surveillance and crisis management, and providing a cross-country safety net. A gradual approach would therefore be appropriate for promoting regional financial integration.

References

Prepared by Yiqun Wu (APD) and Xiaohui Wu (IMF summer intern).

The Plus Three economies are China, Japan, and Korea.

Using bank flows in the regressions for robustness check does not alter the conclusions.

The trade intensity score is calculated as a country’s share in global trade as a proportion of its GDP share. Portfolio investment intensity is defined in a similar way. The intensity score formula is: intensityit=(fit/Σi=1nfit)(GDPit/Σi=1nGDPit), where fit is the sum of imports and exports or the sum of portfolio investment assets and liabilities for country i at time t; n is the number of countries in the sample.

Alternative financial integration measures such as banking positions are used as robustness checks.

For more details and results, see Wu and Wu (2018). Institutional quality is found to be a key factor affecting trade in financial assets. Ananchotikul, Piao, and Zoli (2015) find that the lack of regulatory harmonization has a more negative effect on intra-Asia investment.

The results are robust when banking position is used as the measure for financial integration.

This index, taken from the World Bank’s Worldwide Governance Indicators database, reflects a country’s progress in enhancing law and enforcement and building a trustworthy society. Results are similar when other institutional- quality indicators are used. The results also hold when lagged rule-of-law index and instrumental variable (latitude, fractionalization of language and religion) are used to account for the possible endogeneity of institutional quality.

These results are in line with Park and Shin (2016).

The results are robust when the region is restricted to ASEAN (although less significant) or ASEAN-5, and robust with or without Singapore.

Adrian, Etula, and Muir (2011) propose U.S. security broker-dealer sector leverage (assets-to-equity) as a better liquidity measure because it is market oriented and reflects timely underlying market conditions. Bruno and Shin (2013) use this leverage as their preferred global liquidity indicator. Our results using the Chicago Board Options Exchange Volatility Index are similar although less significant, whereas using US and EU credit-to-GDP growth as liquidity indicators also yields similar results.

Portfolio investment from ASEAN-5 economies also exhibits less volatility than that from global investors.

Financial markets are, in essence, the arrangements for processing information in networks of savers and investors (Gochoco-Bautista and Remolona 2012).

Our findings that regional investors are less likely to pull out of their investments in the face of a crisis also suggest that regional financial integration is a suitable vehicle for promoting much needed long-term investment, such as in infrastructure. Indeed, through mobilizing savings and lowering financing costs, regional financial integration has been explored as a regional approach for financing infrastructure and other development needs.

For more details, see Wu and Wu (2018).

The ordinary least squares regression includes standard factors affecting the current account, such as the dependency ratio and fiscal balance, and global (regional) financial integration index (z-score). We include year and country fixed effects and use robust standard errors.

Global (regional) financial integration in Table 5 refers to the global (regional) financial integration index (z-score) calculated from portfolio investment data. Using z-scores calculated from FDI data has similar results.

Singapore is not included in this exercise; the results are less significant with Singapore, perhaps because of Singapore’s status as a financial center and its higher stage of development.

For a fuller treatment on the risks and challenges of financial integration, see Obstfeld and Taylor (2004), and Barro and Lee (2011).

For a discussion of challenges and policy initiatives for ASEAN financial integration in the areas of financial sector liberalization, capital account liberalization, and progress in setting up regional institutions to enhance regional cooperation, see Wu and Wu (2018).

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