Deepening individual capital markets will help address critical funding gaps in ASEAN, including infrastructure development needs, by allowing issuers to raise affordable capital at scale and providing investors with viable and diverse options to deploy short- and long-term domestic savings. This is a prerequisite to address the disparity in maturity of capital markets across the region and promote better ASEAN capital market integration.
These issues were discussed during a roundtable titled, “Deepening Capital Markets in ASEAN: Opportunities and Challenges” which was organised by CIMB ASEAN Research Institute (CARI) today, in collaboration with the ASEAN Business Club and McKinsey & Company (McKinsey).
The roundtable was chaired by Tan Sri Dr. Munir Majid, Chairman of CARI and President of the ASEAN Business Club. The panel of speakers comprised Tan Sri Ranjit Ajit Singh, Executive Chairman of the Securities Commission Malaysia and Chairman of the ASEAN Capital Markets Forum; Datuk Seri Nazir Razak, Chairman of CIMB Group; Joydeep Sengupta, Senior Partner and Managing Partner, Asia–Pacific Banking Practice from McKinsey & Company; and Dr. Bambang Irawan, Senior Research Fellow, CARI.
During the roundtable, McKinsey launched a report titled, “Deepening capital markets in emerging economies”, which assessed capital markets in Asia using its Asian Capital Markets Development Index. The index measured how accommodative each capital market was in allowing issuers to fundraise at scale and creating investment opportunities, as well as pricing efficiency.
The index ranked Singapore’s capital market as the deepest in ASEAN with a score of 3.4 out of 5, followed by Malaysia at 3.25, Thailand at 2.8, Philippines at 2.25, Indonesia at 2.2 and Vietnam at 1.2. According to McKinsey deeper capital markets in ASEAN could free approximately US$50-100 billion in additional financing.
Joydeep presented some of the findings of the report and suggested that ASEAN policymakers need to make critical policy decisions for long term capital market growth.
“Building vibrant capital markets requires policy makers in ASEAN to diagnose performance at a granular level, design markets for sustainable rather than fast development, and implement a nationwide change-management approach. ASEAN policymakers can consider introducing a series of measures to: develop a liquid government debt securities market; promote the development of a deep and broad investor base for the supply of capital through pension funds and insurance companies; build cornerstone institutions such as credit enhancement agencies to be a catalyst for rapid development of priority sectors; and offer tax incentives for promoting the development of priority assets like infrastructure while removing tax policies that hamper development.”
Considerations for deepening the capital markets were discussed against a backdrop of the Asian Development Bank’s estimate that Southeast Asia would require about US$3.1 trillion in infrastructure investments through to 2030; ASEAN capital markets’ combined value of US$3.5 trillion; and its high savings rate of 32% compared to the global savings rate of 25%.
Ranjit emphasised that market-based financing is essential in meeting the infrastructure funding requirements of ASEAN economies needed for more sustainable growth of the region and continued prosperity of its people.
“The ASEAN Capital Markets Forum (ACMF) is focusing on greater interconnectivity of our capital markets as a precursor to integration. Connectivity of ASEAN member states is vital in enabling the region to fund its own growth as well as to attract outside investments. Because individual member states need to be at a certain level of readiness and development to meaningfully participate and benefit from regional connectivity, we introduced the ACMF Market Development Programme where ACMF members provide support to each other in building capacity and developing markets.
“ACMF efforts are aimed at facilitating measures that are relevant to market needs and will contribute to sustainable markets. Towards this end, we are collaborating with industry in driving initiatives to develop the regional markets,” he added.
Nazir welcomed the recalibration of the ACMF Vision 2025 to ensure capital markets that are “inter-connected, inclusive and resilient”, which is more realistic than the original "lofty" dream of fully integrated capital markets.
“ASEAN needs to focus on more substantive real obstacles to intra-ASEAN capital flows in both debt and equity markets, such as withholding taxes and settlement processes, and not just highprofile and easier initiatives. At the same time, ASEAN needs to step up its efforts to promote intra-ASEAN investment as most ASEAN investors tend to instinctively look at developed markets for diversification,” he said.
Dr. Bambang said Indonesian capital market faces multiple challenges compared to its ASEAN peers but is taking steps to further develop its market infrastructure.
“Indonesia faces limited market participation due to challenges such as limited number of instruments and derivative products, and companies also prefer to stay private rather than going public to avoid paying taxes. However, Indonesia is taking steps to develop the domestic capital market infrastructure, particularly through more intensive communication and collaboration between the regulator and market participants. Going forward, Indonesia should promote and participate in ASEAN’s efforts to integrate the region’s capital markets and advocate closer cooperation among the relevant ASEAN sectoral bodies such as taxation, payment and settlement system, and infrastructure fund,’’ said Dr. Bambang.
Munir noted that ASEAN capital markets can introduce infrastructure project listing to raise the funding needed for infrastructure development.
“Infrastructure project listings without requiring track record could be considered in more advanced capital markets as an instrument to raise ASEAN and external funding. The Securities Commission Malaysia had achieved some success in the past, and especially given the huge funding deficit in Belt and Road Initiative projects, there is an urgency to establish connectivity in financial markets in order for the physical connectivity to be developed,” said Munir.
The panelists agree that capital markets in ASEAN present various untapped opportunities and the deepening of ASEAN capital markets is crucial to the growth of the region. Countries with less developed capital markets will need to focus on creating strong foundational policies and institutions to harness the power of markets.
Other countries with more established and deeper capital markets and the ACMF can work on harmonising policies across various markets and asset classes. This has the potential to unlock savings in ASEAN, attracting more foreign investment into the region to fund critical infrastructure projects and businesses.
Over 90 senior corporate executives, government officials, and diplomats attended the roundtable.