The Future of ASEAN
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Now that the 20th annual ASEAN Summit is passed and the diplomats have all gone home I thought it would be a good time to look at the current state of things in Southeast Asia. ASEAN is moving rapidly towards the Asian Economic Community (AEC), which they desire to be in place by 2015. The AEC will be an inter-regional free trade zone as well as having strong integration financially and logistically for the member states. Think of the AEC in 2015 to be where Europe was before the introduction of the Euro. There has been no discussion about a single AEC currency and it is unlikely in the near future. Members like Cambodia, Laos and Myanmar have domestic currencies and economies when compared to Singapore iShares MSCI Singapore Index (NYSEMKT: EWS), and Indonesia that make the gulf between Greece and Germany look small.
And we all know how well that turned out.
In October 2011 ASEAN adopted their Master Connectivity Plan which outlined the myriad of projects that needed to be completed by 2015 to achieve their both physical and legal/logistical goals of promoting free trade within the region. Primarily, the physical infrastructure projects that, as yet, have not been completed received the most focus. The Singapore-Kunming Rail Line (SKRL) is a major component of this plan. There are three projects that are on the docket to complete the rail line between Ho Chi Minh City and Bangkok. Three other sections need to be built to connect Bangkok to Kunming. A major spur from the Laos capitol of Vientiane to Vung Ang in north-central Vietnam is the seventh project.
The SKRL along with the Asian Highway Network will have an enormous effect on opening up the Greater Mekong Subregion and facilitating overland trade between seven of ASEAN’s ten members as well as trade with China’s southwestern provinces.
Imports from the West would no longer have to pass by ship through the Malaccan Strait but can be offloaded in Myanmar at Yangon or the proposed, but currently on-hold, mega port project at Dawei, directly West of Bangkok.
The physical restriction presented by the Malaccan Strait is a major impediment to trade from Eastern Africa, India and the Caspian Region. Myanmar in many ways holds the key to unlocking this area of the world. With the political changes that are happening in Myanmar and the likely easing and/or lifting of sanctions by the E.U. and the U.S., following the recent easing of sanctions by Australia, investment demand into Myanmar is reaching a fevered pitch.
The Bay of Bengal is rich in oil and natural gas. Myanmar has the 10th largest known reserves of natural gas in the world. For this reason, China has invested billions into Myanmar’s oil and gas industry and has broken ground on a 2000+ km pipeline and port project that starts in the Bay of Bengal, crosses the northern half of Myanmar and ends at the city of Kunming. This pipeline is due to be completed by the end of 2013 and pumping oil and gas by mid-2014. The implications it are enormous for the world’s oil market as it will drastically reduce the time and cost to ship oil from the Middle East, India, and the ‘Stans’ bordering the Caspian to China, bypassing the Malaccan Strait, the U.S. 7th Fleet and making the U.S.’s desire to isolate Iran from the international oil trade more difficult. Most of the Foreign Direct Investment into Myanmar to this point has been in oil & gas as well as electricity generation.
ASEAN’s connectivity goals go beyond just road and rail. The plan they’ve adopted also encompasses the building and connecting electrical power generation across the entire region. A number of cross border connections are planned. Vietnam, for instance, has investments in hydroelectric power plants in both Cambodia and Laos along the Mekong River.
There are plans to upgrade 47 different ports around the region as well. The current upgrades to the port in Ho Chi Minh City will make it one of the 15 biggest ports in the world, reclaiming the city’s historic role as a hub for Pacific Rim trade. Cross border oil and gas pipeline projects between Malaysia, Singapore and Indonesia already exist and are being expanded upon. Given the reality of globalization and the breaking down of political borders that these physical infrastructure projects creating modern silk roads represent regional partnerships will become more important than we realize right now.
The key for all of this physical infrastructure is for the facilitation of trade across borders. Currently only 25% of ASEAN trade is among ASEAN members as compared to 70% for the EU. Inter-regional trade among ASEAN nations is among the lowest trade for any region in the world. So, the AEC and expanding the integration it represents is a tremendous market opportunity for all of the members. In essence, ASEAN’s best opportunities for economic growth are in its own backyard, as opposed to the U.S. or Europe where their regional trade is already maximized. To this end, upgrading and integrating customs requirements and banking regulations, travel and work visa liberalization as well as food safety standards are all areas that ASEAN is addressing as it pushes towards the AEC. Thai iShares MSCI Thailand Invest Market Index, (NYSEMKT: THD) banks have begun building partnerships all across ASEAN, most recently with KBank partnering with VietninBank to create a presence in Vietnam. No less than 5 Vietnamese banks have opened up branches in Cambodia, where capital controls and foreign investment restrictions are very low.
There is a ton of work that has to be done yet, though. Myanmar and Laos both have currencies whose official exchange rates bear little resemblance to the market exchange rate. Myanmar has made all of the headlines recently, most notably in allowing the Kyat to more freely reflect the reality in Myanmar’s economy. Laos is still struggling with this. Both Cambodia and Vietnam Market Vectors Vietnam ETF, (NYSEMKT: VNM) are attempting to de-dollarize their economies, albeit in completely different ways, but Cambodia’s Riel has no marketable security at this point.
Banking integration was a key discussion point in the meetings prior to the ASEAN Summit, where the groundwork and criteria were laid down to facilitate ASEAN banks of a minimum capitalization and credit worthiness to set up branches in other ASEAN nations, as well as a clearing mechanism for cross-country trading.
The End of the Beginning
And this is the important point to the coming integration of Southeast Asia. As the world begins to adjust to structurally high oil prices, the regionalization of trade will intensify as shipping costs will weigh too heavily for debtor nations to continue being able to export debt and receive goods in return, i.e. the U.S. and the E.U. Therefore, the need for a world reserve currency will drop by an appreciable amount. A higher percentage of trade will clear through regional banks in currencies that are not the U.S. Dollar, creating regional currency blocks. Moreover, the U.S. petrodollar system is breaking down. The moats around the dollar in the form of the international pricing of gold and oil in dollars are no longer so deep and formidable.
At the present time much of ASEAN+3 trade, which includes Japan, China and South Korea, is reliant on exporting to the U.S. and Europe, but those economies are stagnating under the weight of their own debt and demographics. The ties being made today between the ASEAN+3 nations, like the massive investments China iShares FTSE China 25 Index Fund, (NYSEMKT: FXI) is making in Cambodia and Myanmar or Japan’s and Korea’s investments into Vietnam, are laying the foundation for a regional trade block that will be the engine of the 21st century world economy. Capital is fleeing the West and moving East at a staggering rate. A thousand little cuts are being administered to the petrodollar system every day.
With the international market for oil changing before our eyes, i.e. the ouster of Iran from SWIFT by the U.S., what shakes out of this upheaval in international trade is anyone's guess. But, it will be a different system than what exists. Regional versions of SWIFT will emerge. In the meantime strong regional banking centers, Hong Kong?, Singapore?, will become clearing houses for major international trade not denominated in U.S. Dollars. Someone will handle the transactions for Iranian oil on behalf of someone else, unless the U.S. bombs Iran back to the Stone Age.
One gets the sense reading between the headlines that ASEAN understands this and is preparing the region as quickly as possible to handle any breakdown in the current petrodollar system, including attacks on any one member. Hence, this is why the ASEAN+3 group recently doubled the pledged international reserve fund to fight any attacks on a member’s currency. Add to this the formation of a BRICS bank for handling trade among those five nations and it is easy to see how the future is shaping up in the major emerging markets around the world.
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