TOKYO -- The ASEAN Economic Community, or AEC, will kick off by the end of this year, further integrating the 10 members of the Association of Southeast Asian Nations. While the member states are, of course, removing tariffs on goods traded among them, it is important to note that they also intend to establish a unified capital market.
This could stoke the community's equity and bond markets.
Many Southeast Asian companies now take out bank loans and depend on other indirect financing options. But if more companies were to take direct financing routes like issuing their shares or corporate bonds, they would accrue a side benefit: There would be less of a chance for ASEAN to be hit by by the kind of economic crisis that smacked it in 1997.
The crisis began when the Bank of Thailand ran out of foreign currency reserves in its attempt to defend the baht. The Thai currency plunged, and the economy immediately followed.
Thailand, Indonesia, Malaysia and other countries that felt the pain have since rebounded economically and even expanded. Data provided by the Daiwa Institute of Research shows nominal gross domestic product of nine of the ASEAN members (Myanmar is not included) totaled $666 billion in 1995. In 2013, the figure was $2.4 trillion.
During the crisis, currencies tumbled against the dollar. Companies in the hard-hit countries took out massive foreign currency-denominated bank loans. These loans then hit the economies like a second blow.
They also taught the region's corporate sector a hard lesson: It is best to rely on direct financing rather than on banks. Having to pay back foreign currency loans can put the borrower at the mercy of speculation.
The AEC is, among other things, an attempt to facilitate direct financing. Member countries are scurrying to harmonize stock market regulations and remove other obstacles in the path of regionwide direct financing. Singapore Exchange and Bursa Malaysia, the Kuala Lumpur securities market, decided to launch the ASEAN Trading Link in June 2012.
The program allows, for example, Malaysian investors to use local brokerages to buy and sell shares listed in Singapore. In August of the same year, the Thai bourse joined the program. The stock market in Indonesia could become the fourth member. Bourses in the Philippines and other ASEAN countries are likely to follow.
Myanmar will have its first stock exchange by around autumn, located in Yangon. The Daiwa Institute of Research, the Japan Exchange Group, which operates the Tokyo Stock Exchange, and state-owned Myanma Economic Bank have signed a joint-venture agreement to open the stock market. Once trading begins, Brunei will be the only ASEAN nation without a stock market.
With cooperation from Japan, China and South Korea, ASEAN members have been developing their bond markets. According to the Asian Bond Markets Initiative, which was set up by ASEAN and the three other Asian nations, the value of outstanding bonds by issuers in five major ASEAN economies and Vietnam skyrocketed more than 400%, to $1.1 trillion, from the end of December 2000 to the end of September 2014. Sovereign bonds accounted for 70% of the total, down only 3% during the period.
In Southeast Asia, the secondary market, where investors buy and sell corporate bonds issued in the primary market, is still small. Corporate bond issuers and their underwriters cannot warm up the market by themselves. Improving the secondary market will be essential if the AEC is to attract more retail and other investors.