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From Bust to Boom: Southeast Asia’s
Capital Markets Getting It Right This Time
By Paul Smith, CFA
Categories: Corporate Governance, Standards, Ethics & Regulations (SER)
If you can’t make it in China, try Southeast Asia.
This seems to be the mantra these days among international banks and financial
firms that want a foothold in Asia’s most coveted market but are turned off by
regulatory requirements or stiff competition. If China has 1.2 billion people and a
rising middle class, Southeast Asia has 600 million people, growing wealth, and
plenty of investment banking deals too.
According to the Wall Street Journal, investment banking and trading revenues in
Southeast Asia reached $13 billion last year (the second biggest in Asia exJapan after China’s $19 billion) on the back of mega deals such as Thailand’s
C.P. Pokphand’s acquisition of Singapore food and beverage giant Fraser and
Without doubt Southeast Asia is on the ascendancy, largely a result of relative
political stability in the region. I have recently travelled to a number of Southeast
Asian countries and have seen this renewed confidence up close. Thailand is
bouncing back from the chaos of 2009-10 and the massive floods of 2011.
Despite the political turmoil in recent years, Thailand has remarkably managed to
keep up infrastructure development and is actively financing similar projects in its
neighbors in the Greater Mekong Subregion. A highly welcome addition is the
new railway connection between Suvarnabhumi Airport and downtown Bangkok
— finally, we’re no longer getting stuck in traffic! The Philippines also is getting its
act together under a reformist administration, Indonesia is riding the global
resources boom, and the opening up of Myanmar has excited multinationals
from ABB to Unilever.
Integrated securities trading via the ASEAN (Association of Southeast Asian
Nations) Trading Link — which so far includes Singapore, Thailand, and
Malaysia — opens up a lot of possibilities for capital markets development:
deepening liquidity, encouraging more cross-border investments, and putting
savings into long-term investments.
How will the region handle this boom?
Lessons from the last boom in Southeast Asia in the 1990s, which ended with the
1997 Asian financial crisis, point to the need for good corporate governance,
investor protection regulations, transparency, internal controls, risk management
policies, better functioning bankruptcy laws, financial markets oversight, and
investment in qualified finance professionals, among many others. These are the
pillars that ensure that capital markets development is on solid ground and is
sustainable. They are present in varying degrees across the region, with
Singapore and Myanmar lying at opposite extremes. If Southeast Asia wants
sustainable growth, it needs to address a number of issues.
One, Southeast Asian markets are dominated by large family-controlled
conglomerates that are often opaque in their transactions and wield strong
political influence. In some cases, minority shareholders find themselves getting
the short end of the stick. Recent examples include the boardroom tussle at Bumi
PLC and the scandal at Asia Commercial Bank in Vietnam. Putting down
corporate governance, investor protection, and internal control regulations on
paper is one thing, implementing them is another. And regulations become
irrelevant when politics get in the way. There’s a need for independent regulators
that can enforce rules fairly and keep a critical eye out for risky financial
activities, for greater investor education to empower minority investors, and for a
robust legal system for investors to fall back on when things go wrong. Above all,
there’s a need for a change in management culture to recognize that good
corporate governance and other best practices add to the bottom line, too.
Two, setting up the physical backbone for capital markets activity is easy, but
investing in people to run it is often an afterthought. There’s a need to develop
qualified professionals who act based on best practices and ethical and
professional standards, and who are continually updating their training. To
deepen financial expertise and knowledge transfer, governments must be willing
to open their financial sectors to foreign workers as well. Singapore has done this
without prejudice to local talent. But some countries continue to hold on to “locals
first” policies, unofficially reserving senior positions to locals even in foreignowned banks.
Three, Southeast Asia has to ask itself what kind of development it wants. The
region’s rich natural resources are rapidly being exploited for commerce — from
hydropower to minerals. These activities inflict heavy costs on the environment
and to communities living around them. Are environmental, social, and
governance (ESG) issues being considered before such investments are made?
For example, the financing of hydropower in Laos, which can provide electricity
to many households and spur economic growth in this developing country, has to
factor in externalities such as displacement of communities and threats to
Fourth, in the mid-1990s politically well-connected enterprises and families
reaped the most benefits from economic development. It’s time that ordinary
people climb up the economic ladder too. This means finance should not only
serve the needs of conglomerates that bring in the big fees, but also create
opportunities for ordinary people through investment in better health care,
schools, basic infrastructure, and in supporting the growth of smaller
On a recent trip to Jakarta, I found myself in the middle of severe floods that left
a large portion of the city without electricity and drinking water. Floods like these
are common in many Southeast Asian cities, but poorer residents suffer more
than the well to do who can stay dry in their gated communities and high rises
with power generators running 24 hours a day. Southeast Asia has a long way to
go in terms of equitable economic development, but with this new momentum
comes renewed hope for a real change.