Q&A: JAZA on PH economy, ASEAN 2015

For Ayala Corporation chairman and CEO Jaime Augusto Zobel de Ayala, the outlook is bright for the nation, as well as for the region

MANILA, Philippines – It's the golden age of financing, as business leaders like to stress, but is the Philippines well positioned to seize this opportunity?

Jaime Augusto Zobel de Ayala, chairman and CEO of Ayala Corporation, talked to Rappler's Maria Ressa on the sidelines of the World Economic Forum on East Asia held in Makati from Wednesday, May 21, to Friday, May 23.

Ayala shared his positive outlook on the much-touted Philippine economy and the anticipated integration of Southeast Asian countries under the ASEAN Economic Community in 2015.

 BULLISH. Jaime Augusto Zobel de Ayala talks to Rappler during the World Economic Forum on East Asia in Makati. Photo by Rappler

Here are the highlights of the interview:

On the dangers that could be faced by the Philippines amid its rising economy

Zobel de Ayala: Well, the dangers, like anything in life, are: never to be complacent and to build sustainability for the future. Success is wonderful, and all of us even in the corporate sector face this. There are always cycles to things and the key is to use good times to prepare for the challenges ahead. But... the Philippines has been having just a great run, and a lot of good things have been done. I think the President has managed to build a great deal of credibility around his governance agenda. That's allowed the economic cluster, the economic team to build in the momentum that comes with that, and they've done it wisely, creatively, and with their own momentum as well. So, I think we're reaping the benefits of a new credibility in the country.

On how corruption scandals during the Aquino administration may affect institutional credibility

Zobel de Ayala: I think to a certain extent, there has been a systematic approach. Of course, it's received a lot of news, it's out there in the open. Issues of credibility – one has to be careful about [these]. I mean there's always a balance. Right now we're at the stage where transparency is being encouraged and so it has not had a negative effect.

On perceptions about how President Benigno Aquino III has addressed corruption issues

Zobel de Ayala: He has been quite systematic in the way he's dealt with them. But at the same time, in parallel, you've got an economic story that's been quite productive. I think, generally, the way I feel is people have been giving the President the credit and the benefit of the doubt. They feel he's addressing those issues while at the same time keeping the engine of growth in place. Our job in the business sector is to keep that engine of growth going and we're all trying to contribute to it in the best way we can.

On what he wants to see in the last 2 years of the Aquino administration

Zobel de Ayala: I think this always happens with any administration. The first couple of years are building confidence and momentum. I think there's a lot of momentum now. The story of the country is good, the credibility is there. The key is really to take that momentum and give it everything you've got, all the way to the end. To be fair to the President... we've grown tremendously. The population has grown, we've got a young population, and the economy has grown. As it happens with something like that, you know that infrastructure has to be there to support that growth. We are, as a country, a decade or two behind where we should be. So there should be a lot of focus on the PPP Projects – the Public Private Partnerships, but to be fair to government, if you look at what's been taking place in the DPWH and other areas, I mean people like Public Works and Highways Secretary Rogelio Singson have really been [working] in that sector in a very productive way. There's just been a lot taking place in the roll out of infrastructure.

On whether the PhilIppines is ready for the ASEAN economic community

Zobel de Ayala: I think so, very much so. I think people have seen this ASEAN economic community as a kind of preparation, a date when all these things happen. There have been a lot of wins within each passing month, within each passing 6 months, each passing year. We've really moved already, beyond, ahead of time to a fairly low-tariff for most goods and services. That's already the environment that we're in. Many of the issues that ASEAN has been trying to institute, have really been happening.

On how to raise awareness regarding ASEAN

Zobel de Ayala: I think some countries are more advanced than others. We tend to be a little bit insular around the ASEAN arena. I think a lot of it came from the fact that we've had one big crisis and one small crisis. A lot was happening between Asian countries in the '90s; people forget that. Then '97 [the Asian financial crisis] happened and people retreated back to their homes and their countries and national boundaries. Then they started coming out again in 2008 and that was a more global phenomenon and people paused again. I think there has been a natural movement. While many companies are not fully aware, a lot of them must be small and medium-sized entities. I generally think that they've all been adjusting in their own way to a new reality, and even if they don't really know it, they're feeling it in the price of goods, the way things are done, how transactions take place. Not everybody is cognizant of a broad framework that drives this, they're just cognizant of the way they move on a daily basis.

On who may be on the losing side in ASEAN 2015

Zobel de Ayala: I think the ones who will lose are the ones who have been comfortable or have thrived in a highly protected environment, I think there are less and less of those industries. Of course, they still exist. But anyone who has not had the kind of pressures to bring down cost, to be more efficient, to take productivity up, to look for talent that is imaginative, find solutions, anyone in industries that have been very closed will have a tough time adjusting. Anyone in the export industries by their very nature are usually quite competitive. If not, they won't be able to thrive. So, those are already okay. It's maybe the very entrenched domestic industries that have lived in a fairly protective environment that will have a tough time.

On how prepared the Ayala Corporation is for the ASEAN Economic Community

Zobel de Ayala: I'd like to think that... all our companies, we're all in competitive industries. Real estate is very competitive across the board. The banking sector is very competitive, much more so than ever before. Water distribution is of course a monopoly, but highly regulated and with some very tight controls. And then we have a couple of export industries that have had to deal in a global environment. We're as prepared I think as any company can be. We like an environment where there's a lot of transparency, where the rules are clear. ASEAN is encouraging that. This is good for us. - Angela Casauay/Rappler

AEC 2015: Opportunities and challenges

THE ASEAN Economic Community (AEC) can facilitate ASEAN’s further integration into the global economy and create conditions to foster economic development and inclusion. When it is fully operational, the AEC will feature a single market where goods, services, capital and skilled labor will flow more freely. While 2015 will be an important symbolic milestone, the roadmap will not be fully implemented by then. The principle of the “ASEAN way” embodies the notions of non-interference, minimal institutionalization, and operating by consensus at countries own pace. According to a recent Asian Development Bank (ADB) study, ASEAN “has no prospect of coming close to... a single market by the AEC’s 2015 deadline -- or even by 2020 or 2025.”

Growing intra-ASEAN trade is already benefitting the region, strengthening regional production chains, making possible the diffusion of new technologies, stimulating foreign direct investments (FDI), and helping raise employment. ASEAN countries are transitioning to more domestic demand-driven growth models, supported by youthful demographics, a rising middle class, improving connectivity and investments in infrastructure. These factors should help drive intra-ASEAN trade in final goods and services. It should also benefit ASEAN’s trading partners, help to narrow ASEAN current account surpluses and reduce global imbalances.

Full implementation of AEC commitments could lead to large welfare gains, adding as much as 5% of ASEAN GDP. By ASEAN’s scorecards, progress is being made and over three-quarters of AEC targets have been reached. ASEAN’s gains would be higher if the AEC leads to free trade agreements with external partners, including the Regional Comprehensive Economic Partnership (RCEP) and the Transpacific Partnership (TPP).

AEC’s challenge is to create a region-wide enabling environment that facilitates growing connectivity and promotes high quality, inclusive growth. Investment must increase to close gaps in hard and soft infrastructure and skills, and financial fragmentation must be overcome by harmonizing standards and regulations. ASEAN countries must also strengthen labor market and social insurance institutions in order to prepare for and better deal with the possible adverse effects of greater integration.

Tariff rates are either zero or low for nearly all goods in ASEAN, but trade and transport costs are still high. The priority is to remove nontariff barriers (most of them behind-the-border measures) that are the most important remaining hurdle to AEC’s goal of a “single market and production base” and strengthen trade in services, particularly high value-added ones. ASEAN must ratify and act on regional agreements (e.g., ASEAN Single Window in customs, regional transport links) and align them with national domestic laws. In the Philippines, while more than 99% of goods of ASEAN origin have zero tariff, tariffs on sensitive agricultural products remain elevated (in 2015, the Philippine rice tariff on imports from ASEAN will fall to 35% from 40%, and for sugar, the tariff will drop to 5% from 10%).

To close the region’s hard infrastructure gap (up to $1 trillion over 10 years according to the ADB), it will be important to step up regional cooperation and leverage regional resources, including by expanding the ASEAN Infrastructure Fund and tapping into new initiatives like the Asian Infrastructure Investment Bank. The Philippines also has room to raise government infrastructure spending from its very low levels by mobilizing revenue and expediting implementation of PPPs with due regard to fiscal risks.

It is also imperative to improve ASEAN’s soft infrastructure, including its investment climate. Apart from Singapore, Malaysia and Thailand, ASEAN countries rank below average in the World Bank’s Doing Business index (Singapore tops competitiveness rankings and accounts for 40% of FDI into ASEAN). Foreign ownership restrictions are still common, particularly in services, and should be reduced. This is particularly true for the Philippines where foreign investment restrictions are pervasive and reducing the cost of doing business is stifled by a weak competition framework.

Financial integration lags well behind trade integration in ASEAN. The ASEAN Banking Integration Framework aims at creating a “semi-integrated” market by 2020 with a limited number of national champions, the Qualified ASEAN Banks. The European experience demonstrates the need for stronger regional mechanisms to manage risks from the rise of such large banks. Efforts to develop bond markets in Asia are bearing fruit, including the Asian Bond Market Initiative. With growing investor bases, higher liquidity and lower yields, ASEAN-5 bond markets could expand rapidly and power a “twin engine” ASEAN financial system that funds its large infrastructure needs. Consideration could also be given to a regional central counter party to benefit from economies of scale. ASEAN stock exchanges and regulators are creating an “ASEAN asset class” that could be a liquid asset for institutional investors and a few exchanges have linked up so that investors can trade seamlessly across borders, although obstacles remain with respect to mutual recognition.

The AEC’s commitments focus on facilitating mobility of skilled labor, implemented through mutual recognition agreements (MRAs) for qualifications in a number of professional services. MRAs may not allow unrestricted mobility of foreign professionals if they conflict with domestic rules and regulations requiring further progress on harmonization of standards.

Stay tuned for next month’s column that will focus on the challenges for the Philippines.

(The author is the IMF Resident Representative for the Philippines. The views expressed herein are those of the author and should not be attributed to the IMF, its Executive Board, or its management.)

source:  Businessworld

Bank M&As seen accelerating

BANK MERGERS and acquisitions will accelerate across Southeast Asia given the region’s impending economic integration, industry executives yesterday said.

“The next few years will be a tumultuous time ... characterized by a sharp acceleration of mergers and acquisitions, in some cases driven by market, and in some cases by regulators and governments,” KPMG Asia Pacific Chairman Tham Sai Choy said.

Mr. Tham spoke at a luncheon for Finance Secretary Cesar V. Purisima and visiting Malaysian Second Finance Minister Dato’ Seri Ahmad Husni Hanadzlah.

“ASEAN (Association of Southeast Asian Nations) banks have some way to go in growing to be internationally competitive,” Mr. Tham noted, adding: “Smaller banks are inherently risky, and if enough of them are threatened, the domino effect can ensue and threaten the system as a whole.”

East West Banking Corp. President Antonio C. Moncupa, Jr. echoed this, saying: “When banking industries integrate, inevitably, there will be mergers and acquisitions.”

Local banks, he claimed, still have “time to prepare” as “the competition ... will proceed very slowly”.

“The Philippines has been hosting foreign banks in the last 15, 20 years ... So far, the effect on the domestic financial market has not been that substantial,” Mr. Moncupa said.

While there will be “qualitative shifts” when it comes to the entry of regional banks -- which will operate “just like any domestic commercial bank” under the integration plan -- “there’s enough time for all of us to think and to assess where we should place ourselves”.

KPMG Partner Andrew Tinney, who also took to the podium at the luncheon, described the need to size up as “critical”.

“The key question and challenge, as I see it, is the ability for the banks in ASEAN to really take up that challenge -- to have the size and scale, capabilities, sophistication,” he said.

Last month, ratings agency Standard & Poor’s said that for Philippine banks “greater scale is essential ... to deal with the more intense incoming competition”.

The debt watcher said that consolidation, which the Bangko Sentral ng Pilipinas is urging smaller banks to pursue in light of ASEAN integration in 2015, would “likely improve the system’s competitive dynamics”.

“The number of universal and commercial banks -- which dominate the system with more than an 80% market share -- have remained stubbornly high. We believe the competitive landscape would benefit from having fewer but stronger banks,” S&P noted.

source:  Businessworld

Financial integration pushed

FINANCE MINISTERS of the Association of Southeast Asian Nations (ASEAN) yesterday urged the fast-tracking of regional financial integration, citing the potential benefits while recognizing countries’ individual challenges.

“We need to accelerate financial integration, for our banks and capital markets ... We need to establish an ASEAN class of investment instruments,” Philippine Finance Secretary Cesar V. Purisima said at the 10th ASEAN Finance Ministers’ Investor Summit (AFMIS) yesterday.

“We have to accentuate the strengths of ASEAN, especially so for investors looking at Asia ... We need to position ourselves as reasonable alternatives to bigger economies in the region like China or Japan for our investors,” Mr. Purisima added.

Myanmar Finance and Revenue Minister U Win Shein reiterated the benefits of integration, saying: “Realizing AEC (ASEAN economic community)... will facilitate the free flow of goods, services, investment, and skilled labor, among others, which will benefit countries individually.”

Mr. Purisima said financial integration would help develop markets in the region.

“What we’re looking at is really deepening the markets, common requirements, disclosure rules, standards ... So that when you look at ASEAN financial instruments, you know that they’re comparable. Also, connecting markets so that trading is deeper,” the Finance chief added.

“Because ... large funds, when they want to invest in a market, they want to do it large chunks. And for that you need liquidity. By integrating markets, you create a deeper market, more liquidity, and ... more attraction from funds throughout the world. This will just strengthen us.”

Integration will also help banks establish cross-border presence or partnerships, he added.

Nguon Sokha, secretary of state at Cambodia’s ministry of economics and finance, acknowledged that ASEAN member countries were at different levels of development, and thus will need to considering their domestic situations.

Myanmar’s Mr. Win Shein said, “[W]e understand that what happens in one country cannot necessarily be absorbed by another. So the homework for us is that we have to make sure financial integration will be beneficial for us”.

Josephine Teo, senior minister of state at Singapore’s ministries of finance and transport, said: “We have to build up the resilience of our financial systems, with our without integration. We should heighten financial surveillance, create buffers.”

Integration, the ASEAM ministers argued, will also help the region buoy itself against external shocks, such as those that could result from higher interest rates due to the normalization of monetary policy in advanced economies like the United States.

Enjoying sound macroeconomic fundamentals and favorable demographics, ASEAN countries expect to perform well vis-a-vis other emerging markets, they said.

“The ASEAN region has fared well in the aftermath of the 2008 global financial crisis. With strong fundamentals and improved regional cooperation, resiliency has further improved,” Myanmar’s Mr. Win Shein said.

Singapore’s Ms. Teo added that while ASEAN was not expected to be fully spared from the adverse effects of the US central bank’s tapering, any impact would be temporary as investors would look at fundamentals in shaping their decisions.

“If you look at FDIs (foreign direct investments) to the region, you will see that what is driving those is the prolonged period of macroeconomic stability. That has been boosting investor confidence,” Ms. Teo said.

The AFMIS also served as a venue for finance ministers to follow up on the results of the recent ASEAN Summit in Myanmar.

Among the programs being fine-tuned, according to the Philippines’ Mr. Purisima, are the ASEAN Financial Integration Framework, ASEAN Banking Integration Framework and the ASEAN Payments and Settlements Systems.

Implementation of the ASEAN Infrastructure Fund -- an integral component of ASEAN’s efforts to strengthen regional physical connectivity and narrow infrastructure development gaps -- was likewise discussed, along with customs cooperation as well as double taxation concerns and withholding tax issues in the proposed AEC.

“The AFMIS is expected to come up with an action plan to promote ASEAN as an attractive investment destination and to intensify policy cooperation and coordination in preparation for the ASEAN Economic Community 2015,” Mr. Purisima said.

ASEAN is composed of Brunei, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam.

Member countries are targeting to integrate their economies starting next year and to realize a fully integrated regional economy in the medium term.

The 10th AFMIS served as curtain raiser for the World Economic Forum on East Asia, which will also be held in Manila from May 21 to 23. -- Bettina Faye V. Roc

source:  Businessworld

'Why the 2015 deadline for the ASEAN economic integration?'

ASEAN is integrating internally...

As ASEAN continues on its long path toward regional economic integration, US companies are responding by developing strategies to operate in and adapt to the region as a single market and production base. In the "ASEAN Business Outlook Survey" released August 2013 and prepared by the US Chamber of Commerce and AmCham Singapore, slightly over half of US companies surveyed said that their companies are preparing strategies based on ASEAN's plans to reduce and eliminate barriers to trade in goods, services, and investment among its member countries.

The survey, highlights of which were presented at the August 19-21 ASEAN Business and Investment Summit in Brunei Darussalam, polled 475 senior executives representing US companies in all ten ASEAN countries, and found great optimism toward the region. 79% of the respondents reported that their company's level of trade and investment in ASEAN has increased over the past two years, and an overwhelming 91% of respondents expect it to increase over the next five years.

This optimism is based, significantly, on economic integration; most respondents—77%—say that ASEAN integration is important in helping their companies do business in the region. One survey respondent explained that the "seamless movement of goods and services will enable productive operations across the ASEAN region."

ASEAN's work on intra-regional tariff reduction, liberalization of trade in services, liberalization of investment, and streamlining of customs administration and procedures are all factoring into US companies' investment decisions. The majority of survey respondents were in the services sector and 68% attached importance to the ASEAN Framework Agreement on Services. 56% of respondents reported that the ASEAN Trade in Goods Agreement is important to their companies' investment plans; 59% said the same of the ASEAN Comprehensive Investment Agreement, while the figure for the trade facilitation and customs development work plan was 63%.

The positive outlook for ASEAN should be encouraging for policymakers in the region. Not only are individual ASEAN countries attractive investment destinations, but the potential of an integrated region with a population of 600 million, a $2 trillion GDP, and good growth prospects is raising ASEAN's profile in the eyes of US investors.

...and integrating externally...

While working to integrate its own internal market, ASEAN has recently entered into free trade agreements with a number of its major regional trading partners: China, Japan, India, Korea, and a joint agreement with Australia & New Zealand. The survey sought to gauge usage of these FTAs by US companies with operations in ASEAN. As it turns out, a significant number of US companies are seeking to take full advantage of these agreements. Nearly half of the US manufacturing companies surveyed say that they utilize the provisions of these agreements to export goods from ASEAN to its major FTA partners: China (63%), Japan (48%), India and Korea (47%), and Australia & New Zealand (45%). This, in turn, is boosting ASEAN's total exports, and helping facilitate its integration with the rest of Asia.

Use of the services provisions for these agreements is much lower however, perhaps reflecting the limited coverage of services in those agreements. Of ASEAN's three FTAs for which services provisions are in effect (services provisions for India and Japan have yet to be implemented), 33% of respondents reported exporting services from ASEAN to China. For Korea, and Australia & New Zealand, the figures were 27% and 21%, respectively. There is likely to be room for significant growth in this area, given that services account for the greatest share of economic output in most ASEAN countries, and that the barriers to trade in services tend to be high relative to trade in goods.

While significant numbers of US companies are using these agreements, many still are not, which raises a question of how much untapped export potential exists. Respondents cited a variety of reasons for not using these FTAs, but one common theme was simply a lack of familiarity with the agreements.

...but facing skepticism

The ASEAN Economic Community (AEC) in a sense represents the culmination of ASEAN's aspirations toward regional integration. The AEC articulates the vision of an economically-integrated region by the end of 2015 between all ten member states: Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam. The vision is for a single market and production base in a highly competitive economic region with equitable economic development and fully integrated into the global economy.

As the survey demonstrates, US companies clearly think that the AEC is important; however, just over half of respondents surveyed—52%—do not think that this goal will in be place by the 2015 deadline. Only 23% of respondents believe that ASEAN will realize the goals of the AEC by 2015, with the remainder of respondents neutral on this question. Of the respondents who answered that it was "unlikely" for the AEC's goals to be met by 2015, 59%—or almost two-thirds of respondents—believe it will not happen until 2020 or later.

Whether warranted or not, this skepticism suggests that additional education and outreach needs to be done, and ASEAN should be doing more to broadcast the AEC benchmarks that it has already met. As one survey respondent aptly stated, "The AEC 2015, we feel, will have enormous and positive impact in the years following 2015, but is not well understood within our region, let alone outside of it."

Looking ahead

ASEAN is an attractive market in itself, but it has the opportunity to position itself at the very center of a rapidly evolving regional trade architecture. This survey shows that while US companies are thinking regionally, they will need to focus increasingly on strategies to take advantage of ASEAN's potential as integration accelerates. Meanwhile, ASEAN will need to enhance its efforts to educate investors about the AEC and the advantages of an economically integrated region. If both sides do their part, the benefits of an integrated ASEAN will be realized sooner rather than later and to the benefit of all.

For a copy of the complete survey, click here.

About the Author

John Goyer is Senior Director for Southeast Asia at the US Chamber of Commerce. He can be contacted via email at jgoyer@uschamber.com. This piece was first published September 19, 2013.

The views expressed here are solely those of the author and not of any organization with which the author is affiliated.

The Asia Pacific Bulletin (APB) is produced by the East-West Center in Washington DC, designed to capture the essence of dialogue and debate on issues of concern in US-Asia relations. For comments/responses on APB issues or article submissions, please contact washington@eastwestcenter.org.