1

Enhancing Cooperation & Regional IntegrationEnhancing Cooperation & Regional Integration

of ASEAN Equity Markets of ASEAN Equity Markets

OECDOECD--ADBI 12ADBI 12thth Roundtable on Roundtable on Capital Market Reform in AsiaCapital Market Reform in Asia

TokyoTokyo7 February 2012 7 February 2012

Presented by:

1 1

Presented by:Mohd Sani Ismail

Financial Sector SpecialistPublic Management, Finance and Trade Division (SEPF)

Southeast Asia DepartmentAsian Development Bank

Overview

I. Regional Integration: Definition & Models 

II ASEAN E i M k 2007 2010II. ASEAN Equity Markets 2007‐2010

III. ASEAN Capital Market Forum (ACMF) 

Implementation Plan 

IV. ADB’s Support & Priority AreasIV. ADB s Support & Priority Areas

V. Conclusion and Food For Thought 

22

2

gWhat does Regional Capital Market 

Integration Mean?

Investor Can buy and sell

securities in any stock market without restriction

IntermediariesCan offer their services throughout the region

without restriction

CompaniesRegulators Cooperation ranging from

information sharing to joint enforcement

Companies Can raise capital

anywhere in the region & cheaper financing given lower transaction costs

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Models of Integration

Single Undertaking

ASEAN EU

Single Undertaking

Variable Geometry

Critical Mass

Create enabling conditions for access based primarily on mutual recognition.Supported by some essential harmonization and a greater

Focus on harmonization of conditions for cross border access in terms of laws, and regulations. Supported by mutual recognition in any sectorsCritical Mass and a greater

freedom for capital movements

any sectors that are not subject to harmonization & by liberalization measures.

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3

ASEAN EQUITY MARKETS 2010Different Stages of Development

Domestic Total Value of Turnover

Among Southeast Asian countries, big differences exist in terms of market cap, total value share of trading & turnover velocity

Domestic Market Cap ($ Million)

Total Value of Share Trading ($ Million)

Turnover Velocity (domestic)

Indonesia 360,388.1 103,676.9 36.5%

Malaysia 408,689.1 111,821.4 32.1%

Philippines 157,320.5 21,642.3 19.2%

Singapore 647,226.4 288,390.2 53.3%

Thailand 277,731.7 211,673 94.5%

Source: World Federation of Exchanges, 201055

ASEAN Equity Markets 2007‐2010Domestic Market Cap ($ Million)

2007 2008 2009 2010

Domestic Market Capitalization

Bursa Malaysia 325.290.3 189,086.6 286,157.3 408,689.1

Indonesia SE 211,693.0 98,760.6 214,941.5 360,388.1

Philippine SE 103,006.9 52,030.6 86,349.4 157,320.5

p

200,000.0

300,000.0

400,000.0

500,000.0

600,000.0

700,000.0

$ M

illi

on

2007

2008

2009

2010

Source: World Federation of Exchanges, 2007 - 2010

Singapore Exchange 539,176.6 264,974.4 481,246.7 647,226.4

Thailand SE 197,129.4 103,128.2 176,956.1 277,731.7

-

100,000.0

BursaMalaysia

IndonesiaSE

PhilippineSE

SingaporeExchange

Thailand SE

Exchanges

66

4

ASEAN Equity Markets 2007‐2010Total Number of Listed Companies 

2007 2008 2009 2010

Bursa 986 976 959 956

Total Number of Listed Companies

Bursa Malaysia

986 976 959 956

Indonesia SE

383 396 398 420

Philippines SE

244 246 248 253

Si 762 767 773 778 200

400

600

800

1,000

1,200

2007

2008

2009

2010

Source: World Federation of Exchanges, 2007 - 2010

Singapore Exchange

762 767 773 778

Thailand SE

523 525 535 541

0

200

BursaMalaysia

Indonesia SE Philippine SE SingaporeExchange

Thailand SE

Exchanges

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How do We Measure Regional (Equity) Market Integration?

Measurement

Quantitative- Bilateral portfolio intra ASEAN holdings

Qualitative- eg. harmonized disclosure standards

- cross border di t ttl t

Provided all other variables are constant, decrease in transaction costs between two financial markets increases demand for assets

holdings- Comovement of stock prices

dispute settlement- mutual recognition

88

5

gIntra ASEAN Portfolio Investment has 

been increasing…

Intra ASEAN Investment and Growth Percentage

30 60

24.83

16.79

12.40

19.95

13.27

47.89%

35.4%

3.75%

50.34%

10

15

20

25

30

$ B

illion

30

-20

-10

0

10

20

30

40

50

60

Per

centa

ge

Source: CPIS Data, IMF website 2006 - 20010

-37.84%

0

5

2006 2007 2008 2009 2010

-50

-40

-30

Intra Investment ($Billiion) Growth Percentage

99

But intra ASEAN equity investment  as % of total equity  investment has not been improving much

Percentage of Intra ASEAN Investment

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11.37 10.47 8.56 8.62 11.03

(30)

(20)

(10)

0

10

20

30

40

50

60

2006 2007 2008 2009 2010Perc

enta

ge

Source: based on author’s calculation using CPIS Data, IMF website 2006 - 2010

The low intra ASEAN equity investment reflects the same integration dynamics with intra East Asian investments which is also relatively lower compared to total investments. This suggests that more needs to be done for ASEAN regional capital market integration

(50)

(40)

Growth % % of Total Intra ASEAN Investment

1010

6

Intra ASEAN-3 Investment and Growth Percentage

19.70

62.68

23 57

30.7115

20

25

40.00

60.00

80.00

Intra ASEAN Investment and Growth Percentage

19.95

24.83

50.34%

35.4%

47.89%

20

25

30

20

30

40

50

60

Intra ASEAN‐3 investment as engine

Investment of Intra ASEAN and ASEAN 3

24.8325

30

IntraASEAN-6I t t

12.11

9.80

14.8111.33

23.57

-33.83

3.00

0

5

10

2006 2007 2008 2009 2010

-40.00

-20.00

0.00

20.00

Intra Investment ($Billion) Growth Percentage

13.2712.40

16.793.75%

-37.84%

0

5

10

15

2006 2007 2008 2009 2010

-50

-40

-30

-20

-10

0

10

Intra Investment ($Billiion) Growth Percentage

16.79

12.40

19.95

13.27

19.70

12.11

9.80

14.81

11.33

0

5

10

15

20

2006 2007 2008 2009 2010

Investment($Billion)

IntraASEAN-3Investment($Billion)

Increased by $4.4 Billion

Increased by $8B

Increased by $2.3B, 52% of $4.4B

Increased by $7.6B95% of $8B

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Implementation Plan Broad Themes & Key Initiatives

Source: ACMF’s website

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Based on ACMF Implementation Plan to promote capital market integration in ASEAN – Working Group Approach

WORKING GROUPS

ACMF Implementation Plan to promote the development of an integrated capital market to achieve the objectives of the AEC Blueprint  

Creating an enabling environment for regional integration

Creating the infrastructure and regionally focused products and 

• Mutual recognition of prospectus and facilitating supporting marketing services involved in cross border offerings  :  WG A ‐ MAS

• Cross  border enforcement &  dispute resolution: WG C (BAPEPAM) & WGDREM

• Expedited review for secondary listing, ASEAN corporate governance ranking/scorecard WG D – SC, Malaysia

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• Reinforce ASEAN working processes:  ASEC• Monitor and facilitate the implementation of these 

measures, work with relevant authorities to ensure coordination of the ASEAN financial market integration

intermediaries

Strengthening the implementation process

Malaysia• mutual recognition of CIS for cross border offering: 

WG B – Thai SEC

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Working Mechanism for the Implementation PlanWorking Mechanism for the Implementation Plan

Tier IASEAN Finance Ministers

(AFM)Implementation Plan

Working Mechanism for the Implementation Plan 

A Group of Experts (GOE)(as identified by ACMF)

ASEAN Capital Markets Forum (ACMF)

Tier II

ADB Team & Consultants-ADB Staff

-International Consultants--National Experts

ACMF Working Groups

Tier III: Technical Group (TG)

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2001: TA for strengthening Asian Financial Market

2005: TA for supporting enhanced cooperation among Southeast  Asian Equity Markets – Output: ASEAN Strategic 

ADB’s Support for regional capital market integration

Alliance Framework

2008: TA for strengthening Southeast Asian Financial Market – Output: Framework on Implementation Plan 2015

[9 April 2009: Approval of Implementation Plan by ASEAN Finance Ministers Meeting  in Pattaya.]

151515

ADB’s Latest Technical Assistance (2010‐2013)Promoting and Interlinked ASEAN Capital Market

Approval by President of ADB in August 2010

Total amount approved USD2.00 million – co-finance by: Investment Climate Facilitation Fund, Japan of USD1.5 million, and Republic of Korea e-Asia and Knowledge Partnership Fund of USD0.5M

Purpose: to support ACMF implement Implementation Plan 2015 and the ASEAN exchanges in rolling out the ASEAN Common Exchange Gateway which will be the basis of for an interlinked ASEAN capital marketwhich will be the basis of for an interlinked ASEAN capital market

Include capacity building component for securities regulators particularly in Lao, Cambodia and Vietnam

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9

Why ADB is interested in regional capitalmarket integration

BenefitsBenefits

Outcome:

Freer flow of funds through cross

Process:

(i) learn from international best practices

(ii).getting standards/practices d d th h h i ti

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border investments promotes economic growth in DMCs. ASEAN as a regional block provides market size in competing against other regional players

upgraded through harmonization

(iii) capacity building support

(iv) building trust in the region, regional interest vs national interest

(v) expedited capital market development

Priority Areas under 2011 TA Support

Cross Border Dispute Resolution & Enforcement Mechanism

ASEAN Corporate Governance Scorecard/Ranking for ASEAN PLCs

& Enforcement Mechanism Framework

ACMF WG, ASEAN SEC & SWG

ASEAN Stock Exchange LinkageReinforcement of ASEAN

Working Process

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10

ASEAN Corporate Governance (CG) Ranking Methodology/Scorecard

• Develop ASEAN CG ranking methodology based on OECD CG principles

• Develop ASEAN CG ranking methodology based on OECD CG principles

Ph 1

• Validation of methodology with OECD

• Validation of methodology with OECD

Phase 2 • Implementation of CG Ranking and use to brand ASEAN as an asset class

• Implementation of CG Ranking and use to brand ASEAN as an asset class

Ph 3Phase 1 Phase 3

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Aspirations, by 2015…

2015 2013 20142012

ASEAN CG Scorecard: Aspirations by 2015

AEC

Top 30 Domestic List

Top 50 (closed) for Ministers

CG Experts & domestic ranking bodies to rank

Top 100 DomesticList

Top 50 (Open)Regional List

Domestic ranking bodies to rank

Regional CG

Top 300Domestic List

Top 100Regional list

Domestic ranking bodies to rank

All domestic PLCs

Top 100Regional list

Domestic ranking bodies to rank

Regional CG gOversight Committee

Regional CG Oversight Committee

gOversight Committee

Single ASEAN CG Standard ?

2020

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HOST HOST HOSTHOST HOMEHOME

Cross Border Dispute Resolution &Enforcement Mechanism

Disputes between Investor

Vs

Intermediary /

Court:

Recognition and

Enforcement of Award /

ADR: Award

Intermediary / Issuer from

Home Country

of Award / JudgmentCourt:

Judgment

2121

Source: WGDREM presentation, January 2012

Three plausible scenarios for Southeast Asian capital markets: (1) Dwindling relevance; (2) “Cherry-picked” and absorbed in global market?;

and (3) A new force in global markets.

ASEAN Stock Exchange Linkage Initiative

TODAY

• No collaboration or mostly symbolic move that do not lead to actual value creation

• Southeast Asia isolated in the global context

• Little cooperation within Southeast Asia

• European and US exchanges tie up over time with individual exchanges

Dwindling relevance?

TOMORROWTOMORROW

“Cherry picked” and absorbed in

l b l k t?

* Source: McKinsey

with individual exchanges

• Common policy for capital markets development can be defined

• Southeast Asian exchange define an approach to integrate for mutual benefit

global market?

A new force in global markets?

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• The strategic alliance between the Nordic and Baltic exchanges is to create a common Nordic and Baltic Securities

Experience From Other Exchange Alliance:The NOREX Alliances of Nordic and Baltic exchanges

Market via the Alliance, through which the exchanges and market participants offer their services with fewest possible obstacles.

• First alliance to implement a common cross-border trading system with harmonized trading rules and membership requirements.

• Eight very disparate countries, eight

23

g y p , gdifferent regulators, old-fashioned financial laws and regulations.

• Starting to feel competition from larger exchanges

2323

*In 2009, Oslo Børs entered into a strategic partnership with the London Stock Exchange Group, and the NOREX Alliance came to an end.Source: NASDAQ OMX and based on Strategic Working Group presentation, ACMF 2010

2001-2005 Denmark increased turnover by 217%, while Sweden turnover increased by 21%.

DenmarkJoined in 1999

The NOREX Alliance brought significant liquidity growth, in particular in the small market

2000-2005 Iceland increased turnover by 470%, while Sweden turnover was unchanged.

IcelandJoined in 2000

2002-2005 Norway increased turnover by 220%, while Sweden increased turnover by 35%Norway

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35%.NorwayJoined in 2002

2004-2005 Estonia increased turnover by 190%, while Sweden turnover increased by 9%.Estonia

Joined in 20042424

*Trading value of the Copenhagen Stock Exchange is available from 2001.

Source: OMX Group; Bloomberg and presentation by Strategic Working Group, ACMF 2010

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• Trading linkage is expected to go live as follows: 3 exchanges by 2012 possibly 2-3 more by 2013

SWG

ASEAN Exchanges Linkage Timeline & ADB TA

SWG

Timeline 2008: 2011

Design deliverables

TA 6473

TA 7576

(2010 – March 2013)

Proposed Implementation Stage (3 exchanges may go live)

2012 2013:

ADB

TA

TA 6473

2008: 2010:

(2010 – March 2013)

2013:

Objective: Brand ASEAN as an asset class

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Conclusion & Food for Thought

Save for 2008, intra-regional equity investment has been growing although intra ASEAN investment as a percentage of total investment has dropped with a rebound in 2010 driven largely by ASEAN-3. Further growth depend on tighter integration (horizontally across countries and vertically across sectors)tighter integration (horizontally across countries and vertically across sectors)

The integration process is established with the Implementation Plan as the compass. Next step is implementation of activities based on agreed timeline

Achievements such as the harmonizing disclosure standards (ASEAN plus standards) is a good start, the challenge ahead is to remove the plusses and to progress with mutual recognition.

Some issues such as tax and legal enforcement for investor protection are outside of ACMF’s mandate, need support from relevant authorities.

Financial integration and trade integration are complimentary processes. Trade integration can be a stabilizing factor that reduces the likelihood of a financial crisis that can be increased by financial integration.

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THANK YOU