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Liberalisation of Asean’sFinancial Services Sector

EU Private Sector Perspectives:
Liberalisation of   Asean’sFinancial Services Sector

  •  Pascal Kerneis,  Managing Director of the European Services Forum
From Europe’s perspective and considering the success of its own economic integration project the recent decision by Asean member countries to accelerate their economic union by bringing forward the inception date of the Asean Economic Community (AEC) from 2020 to 2015 is a positive, not least for the competitiveness and continued development of the regions economies. Intra-Asean trade has, according to a previous article in this magazine, doubled to $300 Billion in the last decade.

At least as important for the Community’s economic prosperity is the level of ambition among Asean governments to bolster foreign trade with partners including among others, Europe. Putting forward substantive new commitments at the World Trade Organization (WTO) to reduce external trade barriers in key sectors like financial services would go a long way to accomplishing this goal.

One important catalyst for continued economic growth in the Asean community is access to a full range of financial services and it is here that European businesses have a lot to offer. Not only can European financial service providers bring with them new outlets for domestic savings and

valuable know-how that is transferable to domestic firms, but also foreign capital that can be put to work in order to help finance pension schemes and long term infrastructure projects in areas such as roads, bridges, ports, water and sanitation, and energy.

When able to compete in a level playing field environment, foreign financial companies also enhance the competition on the domestic market and bring innovation. Foreign banks and insurers can thus offer to the domestic consumers either better pricing, new choice in financial services, better quality.

This in turn lowers the cost of doing business for domestic companies thereby raising economic competitiveness—something that is ultimately beneficial to the local economy. Foreign banks can also act to ensure that credit continues to flow to industry in times when domestic banks are failing to meet demand. It is equally the case that foreign banks and insurance providers, through the investments they make in the host country tend to build a long term relationship and remain in that country for long periods of time.

Unfortunately, based on the barriers that continue to confront European and other financial services companies in Asean countries, the region’s economic progress is potentially falling short of its full potential.  European financial companies face restrictions that often involve foreign equity caps (25 % for incorporated banks in Thailand; 30 % in Malaysia).

Similar equity restrictions exist for foreign insurance companies like in Malaysia (30% for new comers, 49% in Singapore. The absence of majority control is a major disincentive for businesses when considering a new business venture.  The real assets of services companies are the know-how and the management expertise; without the majority control, it will not invest in the same way, and will certainly not transfer the knowledge to its majority partner.

More obscure restrictions are also applied through various quota measures as in the case of Indonesia where geographical limitations mean that foreign banks, through joint ventures, are allowed in only 11 cities. A myriad of other barriers including limitations on doing business in local currency, burdensome administrative procedures, and non-transparent measures such as economic needs tests all act as a deterrent for European businesses entering Asean markets.

The prospect for a change of thinking among the Asean countries so as to improve their own access to financial services is far from obvious. As part of the WTO’s 1997 Financial Services Agreement, commitments by Asean countries were rather weak. This was likely a reflection of the turmoil caused by the Asian financial crisis.

Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand made very few commitments to open their markets to foreign financial services companies while Myanmar made no offer. But, more than a decade later in the WTO’s current Doha Round we see that Brunei, Myanmar, the Philippines, and Thailand have still not tabled an offer that includes financial services while Malaysia, Singapore, and Indonesia have done little to improve upon their 1997 offers. What is troubling is the continued reluctance among the Asean countries, with the exception of Vietnam and Cambodia, to take a serious step towards liberalisation in financial services.

Signs are pointing to a WTO Ministerial Conference in the latter half of May 2008 providing Asean countries with one last opportunity to take concrete steps towards greater liberalisation in financial services. The benefits of liberalisation in financial services are well known while the risks can be offset by putting in place the proper domestic regulation.

European financial companies are keen to see Asean governments break new ground when it comes to their offers in this Doha round. Allowing majority foreign ownership would enhance the overall business climate in the region.  Binding existing practices and consolidating autonomous domestic reforms made since the Uruguay Rounds 1997 Financial Services Commitments would improve the security and visibility that companies need to do business.

Asean, with its $1 trillion economy, a population of over half a billion cannot stand idle in the face of fierce competition by its neighbours China and India. Let us hope that the Community’s governments realize that their future prosperity lies not only between themselves, but with the rest of the world as well.

Should Asean financial authorities consider that they are not in position in taking commitments at the multilateral WTO level, European financial institutions would strongly advise to engage in bilateral negotiations with the European negotiators in the framework of the Asean EU FTA, so as to further reform and liberalise their financial services sectors which in turn will contribute to a further integration with the two regions.

Pascal Kerneis is the Managing Director of the European Services Forum (ESF). ESF is the voice of the European Services Industry in the international trade in services negotiations. The ESF is involved in the activities of over 20 European services sectors and includes a membership totalling more than 80 European services companies and trade associations. 
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