Information about Asia and the Pacific Asia y el Pacífico
ASEAN Economic Integration
			: Harnessing Benefits and Mitigating Risks

ASEAN Economic Integration: Harnessing Benefits and Mitigating Risks

International Monetary Fund
Published Date:
January 2016
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Information about Asia and the Pacific Asia y el Pacífico
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ASEAN Economic Integration: Harnessing Benefits and Mitigating Risks

Alex Mourmouras (IMF)

ASEAN Workshop, Putrajaya

November 18, 2015


  • Overview of ASEAN

  • Scope for ASEAN Financial Integration

  • Financial Sector Liberalization (FSL)

  • Capital Account Liberalization (CAL)

  • Lessons from Europe

  • Conclusions

ASEAN: Overview

  • Ten emerging and frontier countries committed to form the ASEAN Economic Community (AEC).

  • Heterogeneous group in different stages of economic development (1 NIC, 5 EMs, 4 FEs/LICs), but generally young, fast-growing and dynamic economies.

  • Hefty combined economic weight: Pop’n: 625 million, GDP US$ 2.4 trillion; total trade US$2.5 trillion; intra-ASEAN trade US$ 620 billion.

  • Large potential investment needs, plentiful supply of savings.

  • Financial integration (also: ASEAN+3) has large upside: potential for financial deepening and capital inflows to raise capital per worker and output per worker.

  • Asian and Global Financial Crises, esp. the experience in Europe, has made ASEAN countries very cautious

ASEAN growth averaged slightly above 5 percent during 2011-13. This is down from a simple average of 7 percent during 2003-2007.

Real GDP Growth

(In percent)

Sources: IMF, World Economic Outlook; and IMF staff calculations.

ASEAN countries: different stages of economic development

Table 1.ASEAN Countries: Selected Economic Indicators
IndonesiaMalaysiaPhilippinesSingaporeThailandBrunei DarussalamCambodiaLao P.D.R.MyanmarVietnam
GDP in2013(US$ billions)87031227229638716161056171
Population in 2013 (in millions)248.029.697.55.468.20.415.46.864.989.7
GDP per capita in 2013 (in US$s)
PPP-basis(2012) 1/4,27214,7753,80353,2668,45945,9792,1502,8461,6263,133
Poverty in 2012 (percent of population) 1/
Below US$2 per day13.00.213.8n.a.0.7n.a.15.124.8n.a.13.5
Below national poverty line12.01.726.5n.a.13.2n.a.20.527.6n.a.20.7
Income inequality (Gini coefficient)
2012 2/
Trade openness (imports plus exports in
goods and services in percent of GDP)
Total trade in 201348.0156.955.9359.9144.3113.1137.8114.150.2162.2
Intra-ASEAN trade (goods only, 2012)10.940.510.173.826.427.172.965.518.324.5
FDI inflows during 2010-12 (average, in percent of GDP)
From within ASEAN 3/
Portfolio inflows during 2010-12 (average, in percent of GDP)
From within ASEAN0.−0.2
Private credit in 2012
Growth (in percent)21.111.913.813.314.61.828.
Private credit to GDP ratio33.5128.041.9117.3115.631.238.432.710.894.8
Number of banks in 2012 4/120273712331832312251
Of which: foreign banks241916117156101605
Sources: IMF, World Economic Outlook, Direction of Trade Statistics, Coordinated Direct Investment Survey, Coordinated Portfolio Investment Survey ; World Bank, World Development Indicators; CEIC Data Co.Ltd; Country authorities; and IMF staff calculations.
Sources: IMF, World Economic Outlook, Direction of Trade Statistics, Coordinated Direct Investment Survey, Coordinated Portfolio Investment Survey ; World Bank, World Development Indicators; CEIC Data Co.Ltd; Country authorities; and IMF staff calculations.

ASEAN: Openness to trade and FDI

  • FDI into ASEAN has been setting new records

    But: foreign ownership restrictions are still common, particularly in services (WB 2014)

  • Exports have been engine of growth

    But: non-tariff measures are being added, constraining intra-ASEAN trade and formation of internal market (WB 2014, ISEAS/ADB 2013)

  • TPP would address FDI restrictions and NTBs

FDI flows to ASEAN hit a new record in 2012 (in US$ and as a share of global flows). This applies to ASEAN-4 countries, Singapore, and the group of 5 other ASEAN countries.

Emerging Asia: FDI inflows, 2000-12

(in billions of U.S. dollars)


1/ Other Emerging Asia includes Bangladesh, Bhutan, Korea, Mongolia, Nepal, Sri Lanka, Taiwan Province of China, Timor Leste, Macau SAR.

Financial Integration: FSL + CAL (1)

  • Financial integration in Asia lags trade integration (APD REO, Unteroberdoerster). Same in ASEAN, including in banking integration.

  • But positive momentum:

    • — Local currency bond markets in ASEAN-5

    • — Asian Bond Market Initiative

    • — SGP/MYS/THA stock market linking

    • — ASEAN Infrastructure Fund

  • In frontier ASEAN bank-centered financial systems; need to develop financial infrastructure beyond banking.

  • And while ASEAN is open to inward FDI, capital account restrictions still limit options of some ASEAN savers.

Financial Integration: FSL + CAL (2)

  • AEC is about creating a common market with “free movement of goods, services, investment, skilled labor, and freer flow of capital” the “ASEAN Way”.

    Multi-year process with countries moving at their own pace as they strengthen policies and upgrade institutions.

  • ASEAN way has advantage that countries join when they are ready (ensures ownership and incentive compatibility).

  • ASEAN Working Groups meet regularly.

  • Principles learned from past crises: liberalize FDI inflows first, followed by other long-term flows, restrictions on outflows removed last.

Large Scope for FSL/CAL in ASEAN

  • Despite high overall savings, there are huge investment needs, including in infrastructure (ADB: US$ 1 trillion over ten years)

  • Large education gap also requires resources

  • Urbanization trend adds to urgency to invest

  • Capital flows from within and outside the region could supplement domestic savings

  • Roundtripping of regional savings through financial centers in advanced countries could be eliminated

Financial Sector Liberalization (FSL)

  • Integration of banking, capital markets, insurance, and other financial services can have large benefits

    • ✓ Financial development boosts inclusion and growth

    • ✓ Helps create stronger financial systems, better able to diversify risks

    • ✓ Goes hand in hand with enhanced financial infrastructure (payments, settlements systems)

  • However, ASEAN-wide markets are hampered by:

    • ✓ Fragmentation created by national regulations and standards (e.g. bank supervision, rating agencies, credit bureaus, and securities commissions)

    • ✓ Lack of mutual recognition and common disclosure requirements

Financial Sector Liberalization (FSL)

  • Need to overcome financial protectionism driven by vested interests.

  • But different ASEAN countries have divergent preferences over what part of the financial space to liberalize. Banking sector is especially contentious

  • Options:

    • ✓ Common ASEAN bank passport.

    • ✓ Bilateral or trilateral deals (2+x model) might be way out.

    • ✓ Bank subsidiarization (the Singapore model) to help overcome problems of cross-border banking supervision. Could also be tried in other financial services sectors?

ASEAN: Capital Account Liberaliz. (CAL)

  • Wide divergence in financial openness and financial sector development: De facto, ASEAN-5 countries are a lot more open than frontier economies.

  • However, when compared to other emerging market economies, ASEAN-4 countries are not as open in de jure classifications of capital account openness

  • Response to AFC/GFC shows divergence:

    • ✓ ASEAN-4 tighten current account restrictions and export proceeds repatriation

    • ✓ Frontier countries continue to liberalize (from a low base)


S’pore: open since 80s (except AFC)

ASEAN-4: only few restrictions on nonresidents buying/selling domestic securities (high de facto openness); some current account and export repatriation restrictions imposed after AFC/GFC

Chinn-Ito Index for ASEAN-5

CMLV: financial markets less-developed (low de facto openness; but also low incipient inflows?), little effect of AFC/GFC, openness increasing from low base. Capital account restrictions and export proceeds repatriation remain. Myanmar only recently unified exchange rate

Chinn-Ito Index for CMLV

CAL: Will ASEAN countries be exporters or importers of capital?

ASEAN countries: Current account balances(In percent of GDP)
1990-97 (Avg.)2000-12 (Avg.)2013
Lao P.D.R.−6.6−16.0−29.5
Source: IMF, WEO.
Source: IMF, WEO.
  • Per capita incomes and capital intensity medium or low in ASEAN.

  • ASEAN a net importer of K before AFC: CA deficits of 3-6 percent of GDP

  • ASEAN a net exporter of K after the AFC: CA surpluses of 2 percent of GDP. Reserve acc’n process now complete. Reserves at US$800 billion.

  • But countries with CA deficits face risks (markets label them “fragile”). Need to deal with panics and sudden shifts of K flows and investor sentiment.

Table 2.Potential capital inflows to ASEAN countries

(percent of recipient’s pre-inflow GDP) 1/2/


Calculations are based on a Cobb-Douglas production function yi=AiKiα, with α=1/3.

Inflows for different assumptions about the recipient’s TFP in relation to advanced countries.

Calculations are based on a Cobb-Douglas production function yi=AiKiα, with α=1/3.

Inflows for different assumptions about the recipient’s TFP in relation to advanced countries.

  • Scope for very large capital inflows into ASEAN countries as institutional and technological environments for production converge—along the path of integration laid out by the AEC agreements. We saw this in Europe (“periphery” and CEE).

  • Large potential benefits from CAL but also risks, as EU experience shows

  • OK to gradually open up using best practices

Moving too cautiously on CAL (1)?

  • Empirically, rapid capital account liberalizations have typically ended badly. AFC, GFC, and EU-crisis illustrate what can go wrong with poorly-sequenced CAL.

  • Also: no distinction possible between regional and full liberalization. Therefore: liberalization increases volatility.

  • Some see IMF’s Institutional View as condoning more caution in removing “capital flow measures” (CFM).

  • But: Capital flows react strongly to a strengthening of policies (Malaysia, Indonesia) and CFM should be second line of defense, not first.

  • Safety net (global, regional, and bilateral) should be developed in parallel to liberalization process.

Moving too cautiously on CAL (2)?

  • But again, a gradual pace of CAL should not be an excuse for inaction.

  • Park and Takagi (2012) and ADB (2013):

    • - Current account and FDI-related restrictions could be dismantled quickly

    • - Capital inflow measures could be removed quickly

      • ASEAN-5 already open to non-residents’ purchases of domestic securities (main channel of capital inflows)

    • - Capital outflow liberalization

      • Could be beneficial

        • - Private outflows relieve appreciation pressure (during UMP!)

        • - Could enhance recycling of savings within the region

      • Distinction could be made between institutional and retail investors (?)

Lessons from Europe

  • Europe’s experience could be relevant for ASEAN’s plans. Integration of financial markets and liberalization of capital flows hold great promise but also entail risks as financial and capital flow volatility could rise.

  • Europe had a strong political commitment to an end point. It spelled out objectives and how each member would benefit. However, regional institutions for macro-financial surveillance, oversee integration and deal with potential turbulence were not strong enough.

  • Lessons:

    • ✓ A single financial market requires harmonized regulations, a region-wide framework for banking oversight, and a harmonized deposit guarantee scheme.

    • ✓ Effective cross-border supervision and resolution are key. The set up of regional institutions and legislative process needs to be clarified.

    • ✓ Need regional frameworks and institutions to identify and monitor systemic risk and take manage crisis.


  • Progress is being made on FSL/CAL through regional integration initiatives but more can be done on ABMI, AIF, and stock market linking.

  • Continued financial fragmentation is costly; benefits of properly-paced liberalization are clear.

  • But: recent crises and experience in EU underscore that strong regional institutions need to be set up before financial integration proceeds. Not doing so can be costly.

  • ASEAN’s self-paced, gradual integration strategy is broadly appropriate, although gradualism ought not to become an excuse for inaction.

  • Ground around ASEAN might shift as the TPP and bilateral trade deals increasingly focus on services and other sensitive sectors. This could give ASEAN an important impetus to redouble integration effort.

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