ASEAN Monetary Momentum
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As we approach 2015 and the conversion of ASEAN into the AEC (Asian Economic Community) it is important to note whether we are seeing the necessary changes taking place at the fundamental level which show that the member nations are giving the whole concept more than just lip service. Banking and Finance integration is absolutely one of those bits of infrastructure that is necessary to see moving forward. And it has been taking place in a piecemeal fashion. Not surprisingly the major economic powers Singapore, Malaysia, Indonesia and Thailand are leading the way by proposing and adopting standardized banking regulations and building ties among themselves.
The most recent of which is the Memorandum of Understanding signed by the Monetary Authority of Singapore and the Bank of Thailand who will now allow banks from each country to perform currency exchanges with the local central bank to do business locally. Singapore signed a similar arrangement with Malaysia in November.
So, this means that the Singaporean bank operating in either Malaysia or Thailand can get access to Ringgit or Baht when they need it by providing acceptable collateral, such as Singaporean bonds and vice versa. As well the central banks have signed currency swap agreements to ensure an adequate supply of the local currency in the other country. The swap agreements are more common at this point than these cross-border collateral agreements.
The ASEAN Link between the Singapore Exchange and the Bursa Malaysia went live recently. They will be adding The Stock Exchange of Thailand in August. This linked system, created by the Korea Exchange Corp. creates a common trading platform for all 2200 issues across the three exchanges giving investors and traders in all three countries access to all of them, thereby increasing liquidity and opportunity for cross-border investment. Indonesia’s exchange is due to be linked up next year.
The ASEAN finance ministers just completed another round of talks where they agreed upon a two-tiered roll out for adoption of the cross-border banking and financial regulations agreed upon so far. The so-called ASEAN-5: the aforementioned four countries plus the Philippines will have standardized their regulatory framework and criteria which will allow any bank to open a branch in any of the other countries in the group. These five will act as shepherds to the remaining five ASEAN countries: Brunei, Cambodia, Laos, Myanmar, and Vietnam to prepare for this by 2020.
All of this momentum that is beginning to build in spite of a number of deep divisions and other political issues between member nations is happening because of the force of economics. Malaysia, in particular, is pushing very hard for increased regional trade with its neighbors, very vocally expressing their desire to decouple from the U.S. and European nightmare unfolding. To that end major banking officials in Malaysia are calling for serious overhaul of a number of banking and government regulations to open up their markets and lessen the effects of cronyism and corruption, which is endemic around the region.
The equitization of State Owned Enterprises in all of the ASEAN nations has been a slow and, for some, painful process but it is happening. In my home of Vietnam the banking and telecommunications consolidation is taking a lot longer than was originally proposed. This is causing a drag on the recovery and as a consequence the VN Index has run into strong resistance near 480. The Market Vectors Vietnam Index ETF (NYSEMKT:VNM) has pulled back from the $20-21.50 range and has been trading between $17.50 and $19 since mid-May while shedding more than 10% of its peak AUM of the year.
The entire region has been affected by the crisis in Europe with the KLCI Malaysian Index faring the best and is knocking on its all-time high of 1611. The iShares MSCI Malaysia Index ETF (NYSEMKT:EWM) jumped 2.5% on June 29th, the day after the E.U. Summit; a clear sign that the fear trade is receding. Similar activity was seen in the iShares MSCI Thailand Index ETF (NYSEMKT:THD), up 2.8%. I would be watching all of these single country ETF’s for accumulation.
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