ASEAN Financial Integration

Abstract

The establishment of the ASEAN Economic Community (AEC) at end-2015 has brought into sharp focus the issue of financial and economic integration in the region. This paper takes stock of ASEAN's financial integration and prospects. ASEAN integration could accelerate in the years ahead; it will likely be a safe, gradual process consistent with the "ASEAN way" of consensus decision-making. Properly phased and sequenced, closer financial integration has the potential to help increase real incomes and accelerate real convergence within ASEAN and narrow the region's gap with advanced Asia. Realizing the promise of financial integration will require ASEAN countries to make long-term investments in financial infrastructure. Policymakers can draw on the experience of their more advanced peers and of other regions. Gradualism and safeguards should not be excuses for inaction or financial protectionism. Reliance on flexible policy frameworks and a strengthened and tested regional financial safety net should be part of the agenda. Closer engagement with the Fund could also help.

Exchange rate linkages between the ASEAN currencies, the US dollar and the Chinese RMB

“…As a result, there has been an increase in trade and capital flows within the region. 2 In particular, ASEAN financial integration has made significant progress: direct investment has risen, cross-border banking linkages have deepened, and foreign participation in ASEAN capital markets has increased (Almekinders et al, 2015). At the same time, these economies compete with each other at the global level for trade, foreign direct investment (FDI) and financial resources; this is a consequence of the similar export-and investment-led economic growth model shared by many Asian countries.…”

Regional Financial Integration in ASEAN in the Comparative Perspective

“…In 2014, the value of mutual FDI within the ASEAN increased by 26% to $24.4 billion, reaching 18% of total inbound investment flows in the region (Almekinders et al, 2015). Singapore remains the largest regional investor in the ASEAN.…”

Financial Vulnerability, Capital Flow Reversals, and Divergence Macro-Prudential Policies Posing Challenges to the ASEAN Banking Integration Framework (ABIF)

“…For the ASEAN countries, embarking on an integrated banking system, while not having all the necessary financial infrastructure works in place to tackle the risks due to cross-border financial contagion effects, would pose a banking crisis, especially for the less developed among the countries that are catching up, as Almekinders et al (2015) argued. It is interesting to note, in the existing criteria on eligibility for the World Bank assistance, as of June 30, 2015, not all ASEAN countries are eligible for financial assistance from the World Bank (see Table 5).…”

“…Caprio and Klingebiel (2003) defined systemic banking crises as much or all of bank capital being exhausted. In addition to the potential of systemic banking crises, Almekinders, Fukuda, Mourmouras, and Zhou (2015) warned of potential contagion and spillovers risks owing to catching up by the less developed countries from among the ASEAN countries. This arises from an uneven playing field from among the ASEAN countries.…”