Asian governments are fast realizing that if bullish predictions of the region's growth rates are to materialize, financial deregulation is of paramount importance. Although most recent studies have cited poor physical infrastructure as the main stumbling block to continued rapid development, economists are now arguing that the relative weakness of capital markets is a more serious problem.
Increasing interest in Asia from western investors, together with high local savings rates of 30% to 40% of GDP, mean that supply of capital is not a major constraint in funding infrastructure requirements put at $1.4 trillion over the next 10 years. But a lack of institutions to channel capital into projects could derail the process unless a consistent and rigorous reform programme is put in place.
"A number of Asian infrastructure funds have been set up but their problem has been finding projects to invest in that carry an acceptable level of risk," says Robert Broadfoot, managing director of Hong Kong-based Political and Economic Risk Consultancy. "It's clear that before the infrastructure can be built, there will have to be financial reform. And the countries with the biggest need for new infrastructure, such as China and India, are the ones with the most rudimentary financial sectors."
That's why in the three-cornered fight for investment between China, India and Asean (the Association of Southeast Asian Nations - member states are Brunei, Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam), the last appears to be odds-on favourite. Its banking and financial sectors are already the most advanced in the region and, at the fifth Asean summit in Bangkok in December, government leaders endorsed a plan for fast-track liberalization of the service sector including finance and insurance. Other proposals included the harmonization of investment rules to create an Asean Free Investment Area and the establishment of a single time zone to facilitate regional stock market deals. "Over time, our region's interconnectedness will be as dense as Europe's and we will grow closer as a community," Singapore's prime minister, Goh Chok Tong, said at the summit.
But whether government-sponsored regional initiatives such as this are the major driving force for deregulation or are merely a response to unstoppable economic trends is hotly debated in Asia. Some observers reckon the true push factors are the regional strategies of banks and stockbrokers reaching out to customers that now operate across Asean; the competition between Bangkok, Kuala Lumpur and Singapore to be the region's financial capital; and external pressure from the World Trade Organization, with western countries demanding financial deregulation in developing countries in return for opening their own markets to Asian exports.
Rival to New York
Either way, deregulation is expected to proceed very quickly in Asean, acting as a spur to the other parts of Asia. "We expect to see liberalization taking place [in Asean] quicker than in the world context," says Vijit Supinit, governor of Bank of Thailand.
On the back of this, capital markets growth will be explosive. A World Bank report entitled The Emerging Asian Bond Market says that the east Asian bond market could grow from $300 billion in outstandings in 1994 to over $1 trillion by the end of 2004. "The capital markets are very shallow in the sense that a very small amount of economic assets are represented by financial assets," says Vishvanath Desai, director and chief economist of the Asian Development Bank.
Equity markets are also expected to expand dramatically. A report by ING Barings called The Financial Silk Road predicts that by 2010 the market capitalization of emerging Asian stock markets (excluding India and China) will have increased to 11% of a world total of $31.1 trillion, compared with 6% of $14.9 trillion in 1994.
Echoing the view that Asia's economic promise can only be fully realized through financial sector development, ING Barings director and global strategist Michael Howell says: "Tomorrow's economies are being built in today's capital markets." This two-way link between the real economy and the financial sector has broad implications. Hongkong Bank general manager Chris Langley predicts that in 20 years' time the combined might of Shanghai and Hong Kong will be equivalent to a Tokyo or New York. HSBC Holdings group chairman, William Purves, has said that "by 2018 the Hong Kong stock market will be the largest in the world, its daily turnover will exceed Tokyo's, the Hang Seng Index will be the world's financial pulse, and Hibor will replace Libor as the rate against which the world's debt instruments will be priced."
Spills as well as thrills
These last forecasts rest heavily on continued growth and strengthening of China's economy, and similar claims can be made for Asean financial capital leveraging off the might of Asean, which has a combined population of 400 million, larger than that of the EU, and a combined GDP of roughly $500 billion. The huge potential this offers to financial market players is undeniable, but hard-nosed analysts caution that deregulation in Asean will involve spills as well as thrills. "Asian governments are trying to minimize the costs of deregulation, but it's not a costless process," says Miron Mushkat, Lehman Brothers' chief economist for Asia Pacific.
Impediments to speedy deregulation include a desire to protect national banks and brokerages from foreign competition and to allow them time to upgrade; the strong sway that such interest groups have with governments in defending interest-rate cartels and privileged access to stock markets; and government policies which maintain fixed exchange rate regimes at undervalued levels to benefit the export sector and attempt to prevent their currencies being internationalized. Such pressures will ensure that deregulation will sometimes backtrack as well as blaze trails.
The scale of what needs to be done should not be underestimated. Analysts point to numerous enduring quirks in Asean financial sectors such as Malaysia's 60/40 guideline, which stipulates that foreign joint ventures must raise 60% of their finance with local banks. Overseas participation in equity brokerages is limited and a brokerage licence costs around M$150 million ($60 million). Foreign banks must generally incorporate in Malaysia, which has deterred some players, who fear that the next step might be a demand that bumiputras (indigenous Malays) be allocated a specified minimum proportion of the equity, a strategy that has informed policy in other areas.
"With the exception of Hong Kong, all the stock markets in the region are small fiefdoms. Foreigners are admitted, very reluctantly, and under pressure," says Philip Tose, chairman of the executive committee at Peregrine Investments Holdings in Hong Kong. "Because they are relatively small fiefdoms you have vested interests which, quite naturally, want to keep everything to themselves and develop their own markets."
In the end, however, the desire of specific Asean states' banks and brokerages to follow their customers as they expand throughout the region is going to force the pace of liberalization. There is a strong sense that reciprocity is the favoured route and with only seven countries involved (although the likely membership of Cambodia, Laos and Myanmar will take it to 10) only a moderate cross-border investment thrust should soon start to straighten things out.
The economic background to this is the extent to which Asian trade and investment is now intra-regional rather than following the classic developing-market structure of exports to the US, Japan and Europe and investment flows in return. A widely quoted figure is that intra-Asian trade has surpassed 40% of total Asian trade, although sceptics argue that much of this is accounted for by trade through entrepôts such as Singapore (which has its ultimate destination in the US) and the exchange of goods between units of western multinationals rather than genuine regional commerce. More important, though, is the fact that Asian multinationals have become the predominant investors in the region.
"The most important and still the most ignored component of intra-Asian capital flows is regional direct investment from Asian multinationals," says the ING Barings report The Financial Silk Road. "Their spending is roughly 10 times as great as that of Japanese corporations. Sixty per cent of total regional equity capital is supplied by local companies through cross-border purchases of plant, equipment and real estate."
Thinking regionally
The same is true at the level of portfolio investors. "In 1995, even excluding Japan, roughly one fifth of cross-border portfolio inflows into Asian stock markets [is likely to have] come from within the region itself," says the report. "Taiwanese are buying Philippine shares, Thais are buying Malaysian equities, and the Hong Kong Chinese are buying everything. Three years ago these regional flows accounted for barely one in 20 trades."
As Asean countries develop pension and mutual funds, and as those countries, such as Singapore, which have provident funds gradually allow them to be invested overseas, the volume of funds in intra-regional flows will increase. Says the World Bank report: "Assuming that east Asia can maintain its growth rate of 7.7% over the next decade, and financial sector reform programmes are not drastically reversed, the size of the institutional investors (government-sponsored pension plans, social security organizations and mutual fund industries) is estimated to increase to nearly $400 billion by year 2004."
The upshot is that on every front Asia is thinking and acting regionally. Traders are buying goods locally and selling into Asia's fast-growing consumer markets. Manufacturers are shifting operations to the lowest cost base and their banks are following to provide finance where possible. Portfolio investors are also eager to participate, but are often confounded by high costs and lack of transparency in other Asian markets. "Asians, more than anyone else, believe in the Asian story and local investment funds are set to grow," says Michael Roche, director of HSBC Asset Management, which has declared its intention to become a mutual fund giant in Asia.
Asean responded as early as 1992 to the development of intra-Asian trade when it established the Asean Free Trade Area, whose objective is the abolition of nearly all tariffs by 2003 and as many as possible by 2000. The recent decision to pursue service-sector liberalization and discussions of an Asean Free Investment Area can be seen as an expansion of these objectives.
As well as expanding geographically, Asian corporations are keen to diversify their funding and substitute equity with bonds - the latter are a costlier form of funding but are attractive because they allow family firms to retain control. The lack of market depth and suitable instruments locally has forced many such companies to go to the Euro and yankee markets, even though their home countries contain sizeable savings pools. The Asian challenge in the second half of the 1990s is to create the conditions in which regional investors and issuers can be brought together.
Financial market players are already showing that they mean business in this regard. "If the real economy becomes more integrated you will obtain financial integration, and vice-versa. If tariffs are going to be low, if Asean becomes more integrated or semi-integrated, you will get the financial sector which is more entrepreneurial and dynamic capitalizing on the opportunities," says Lehman's Mushkat.
Take a company such as Seamico Securities, which has become the first Thai stockbroker to venture overseas through its takeover of London-based Marlin Partners. The $15 million deal, primarily a share swap, has given Seamico a distribution base in London and Hong Kong through which it aims to sell Asean securities. The next step, over the coming few years, will be to establish on-the-ground operations throughout the region.
Seamico managing director Aung Htun says that institutional investors regard Asean as more or less a bloc and have begun, for example, analyzing how a Thai telecoms company measures up against an Indonesian company in the same sector.
"We must have the ability to advise clients to, say, sell Siam Cement and buy Indocement, otherwise when the customer leaves Thailand all we can do is wave goodbye to the money," says Htun. "We aim to become the Alex Brown of Asia, a very powerful niche player and mid-market house."
Further developed on the regional road are the banks. Bangkok Bank developed its regional presence as far back as the 1960s when one of its founders found himself on the wrong side of Thai politics and went into exile in Hong Kong. It has set up Asian partnerships to explore opportunities in Indochina and is the largest shareholder in AFC Merchant Bank, an Asean joint venture based in Singapore aimed at mobilizing funds for regional projects.
Singapore's banks, which are awash with funds, boasting average capital adequacy ratios of 20%, have in typical Singapore fashion been instructed by the government to go regional. "We have refocused the bank substantially to tap the growing prosperity in the region," says Peter Seah Lim Huat, president and chief executive of Overseas Union Bank (OUB), one of Singapore's four big banks. "We figure there is no need to run all over the world looking for business opportunities when this region provides them." OUB currently earns 30% of its profits outside Singapore and expects this to increase to between 35% and 40% over the next five years.
Building regional networks
In Malaysia the banks in the vanguard of regional expansion are Public Bank which counts a 90% stake in Cambodian Public Bank among its overseas interests, Maybank which has a 79% stake in PT May Bank Nusa International in Indonesia and a finance company in Singapore, and AMMB which has 49% of Fraser Securities (Singapore) and 60% in stockbroker PT Arab-Malaysian Capital Indonesia. Although the granting of licences to foreign operations can be problematic, the Asian banking scene is starting to open up, with Thailand and Malaysia promoting the development of offshore sectors through Bangkok International Banking Facility licences and the development of Labuan respectively; and a more tolerant attitude to foreign banks in the Philippines and Indonesia.
"None of the governments are going to give out banking licences just like that," says Phuah Eng Chye, regional banking analyst for Kleinwort Benson. "It goes against the popular idea that you don't want too many banks. Yet politicians have made it clear that countries will have to open up to each other and the regional playing field will have to be flat in order for companies to compete regionally." He adds that while the full implications of Asean putting financial services on the fast track are not yet clear, "it's a very important statement" of intent.
A Kleinwort Benson report on Malaysian banks says: "The WTO rules allow liberalization to take place within regional groupings. Banking is thus likely to be liberalized within Asean, and perhaps within the larger East Asian Economic Caucus (EAEC) grouping, as a prelude to a global effort. This would enable the largely domestic Asean banks to build up regional networks prior to taking on the global banking giants on a level playing field in their home markets." Bank of Thailand governor Vijit Supinit freely admits that Asean banks will be given preferential treatment in the liberalization process. "What we see is the opening of institutions in each others' countries. We are prepared to see branches of the Asean commercial banks come in outside the normal quota and eventually securities companies too," he says.
But of more concern to Asian central bankers than who gets banking licences is the impact of liberalization on macroeconomic management. Freer lending policies and the loosening of capital controls have made it more difficult for countries such as Thailand and Malaysia to preserve their exchange rate regimes. These have set great store by maintaining an undervalued parity with the dollar to assist the export sector to sell into the US market. The problem is that this also has the effect of exporting monetary policy to the US, and Thai and Malaysian interest rates should really match America's. But overheating and inflation, some of which has been caused by undervalued currencies making imports expensive, have pushed Thailand, for example, to raise interest rates. The result has been a strong capital inflow which, with the financial sector only liberalized, has become progressively more difficult to control.
Malaysia responded to a similar crisis in 1992 by imposing capital controls. Since last year Thailand has been tinkering with banks' capital adequacy, loan deposit ratios and reserve requirements to try to dampen things down.
In Thailand the practical impact has been felt most severely by banks which rushed to take advantage of new freedoms in the early 1990s, such as raising baht deposits offshore. In the latest tightening, these deposits were removed from loan/deposit calculations, pushing the ratios for some banks to unacceptably high levels. Despite this it appears that liquidity reserve ratios of 7% applied to short-term foreign borrowings will still apply to offshore deposits. One Thai bank, the Bank of Asia, is reported to have amassed 15% of its deposits in offshore Thai baht deposits amounting to the equivalent of $500 million and has strongly objected to the Bank of Thailand's measures.
"Thailand has deregulated much faster over the last couple of years than other Asian countries," says Mark Greenwood, managing director of Asia Equity Thailand in Bangkok. "Now the Bank of Thailand is looking askance at the state of capital flows and saying maybe we don't like this liberalization."
Economists think the long-term solution in southeast Asia will have to be floating exchange rates, and the Bank of Thailand's Vijit confirms the issue is being studied (see interview.) Bangkok Bank's executive vice-president, Nimit Nontapunthawat, believes this could come about in three years, but should be done gradually in stages, with the rate being fixed twice a day rather than once to start off with, with the band slowly being widened.
Whatever one country does will be closely watched by the others. As well as the Asean initiatives, the region's central banks have long held policy dialogues with each other through such bodies as Seanza (Southeast Asia, New Zealand and Australia), Seacen (Southeast Asian Central Banks) and the newest grouping, Emeap (Executive Meeting of East Asia and Pacific Central Banks), which grew out of an initiative by the Bank of Japan.
More dramatically, late last year the central banks of Australia, Hong Kong, Indonesia, Malaysia and Thailand agreed to lend each other foreign reserves if these were needed for market intervention. Clearly, the currency issue and the crisis in Mexico brought on by the sudden removal of short-term capital were uppermost in their minds when coming to the agreement. Now there is talk of bringing China, Japan and Taiwan into the agreement, which would add roughly $250 billion in forex reserves, creating a total pool far in excess of the G7's reserves. With this in mind the governor of the Reserve Bank of Australia, Bernie Fraser, has proposed setting up an Asian version of the Bank for International Settlements to establish emergency support operations and to cooperate over supervision and surveillance of banks.
"Many Emeap countries are likely to be under increasing pressures to liberalize their financial markets, not only from the outside but also domestically, as capital requirements for business and infrastructure outgrow traditional sources and institutions," said Fraser in a speech delivered to the 24th Conference of Economists, Adelaide, last September. "It is possible that the existence of some regional emergency support mechanisms would be helpful in this regard, to the extent that it provided some additional confidence to the authorities contemplating liberalization measures."
Regional cooperation and integration are topping the agenda of almost every Asian-based institution. In its latest Asian Development Outlook, the Asian Development Bank devotes a special chapter to Regional Cooperation in Asia, noting that "complete [financial market] integration would result in interest rate parity across the countries". Clearly Asia is a long way away from achieving this and many in the private sector cast doubt on how realistic these ideas are. They believe a certain amount of harmonization on regulatory matters is possible but think that notions such as cross-listing of shares on regional bourses and the establishment of an Asian bond market in one central location are conceptually flawed.
Manu Bhaskaran, director of Crosby Securities in Singapore, believes competition between countries for capital is a greater driving force for deregulation than is cooperation. "We are in an era of competitive deregulation," he says. This is opening up markets and driving down margins and commissions such as brokerage fees.
Says Crosby Securities chairman Timothy Beardson: "Stock exchanges in the region are trying to push cross-listings but I don't see any reason for it. What investors want is liquidity. To list a Malaysian share on the Bangkok stock exchange doesn't give people liquidity. A lot of stock exchanges in the region would like to raise their profile, to be a regional stock exchange. I think these plans will be hard to put into operation." Beardson also thinks attempts to establish a regional bond market in one location are unlikely to succeed because bond issuance and trading are international, borderless activities. "We trade bonds wherever we can," he says.
Yet the mere fact of countries fighting to attract bond issuance and equity listings to their financial markets is going to drive deregulation. There is also the small matter of the $1 trillion of infrastructure funding that has to be raised. And the fact that south-east Asian countries consider attempts by countries such as Japan to delay deregulation to be a policy failure, and a cause of that nation's recent malaise.
All point to a quickening of the pace of deregulation. Concludes consultant Ky Cao in the book The Changing Capital Markets of East Asia: "The experience has been that when the time for economic liberalization could no longer be avoided, the imperative has been for governments to privatize or deregulate market structures at faster than planned pace, to encourage competition or at least introduce market contestability in order to improve international competitiveness."
| Indicative size of the east Asian bond market* |
| ($ billion: 1994 Prices) |
|
|
End-1994 |
|
End-1995 |
|
End-2004 |
|
|
(Estimate) |
|
(Projected) |
|
(Projected) |
|
$ |
%GDP |
$ |
%GDP |
$ |
%GDP |
| Korea |
161 |
48 |
311 |
59 |
646 |
90 |
| Malaysia |
39 |
56 |
56 |
54 |
103 |
68 |
| Thailand |
14 |
10 |
36 |
18 |
106 |
35 |
| China |
33 |
6 |
71 |
9 |
154 |
13 |
| Indonesia |
9 |
6 |
19 |
9 |
40 |
14 |
| Philippines |
25 |
39 |
39 |
48 |
59 |
59 |
| Total |
282 |
21 |
533 |
28 |
1108 |
41 |
| *Hong Kong and Singapore have been excluded from the analysis since they are |
| international financial centres. |
| Source: World Bank staff estimates |
| Asset size of east Asian institutional investors |
| ($ billion) |
|
|
1994 |
2004 |
|
|
(Actual) |
(Projected) |
| Contractual savings institutions |
|
Central Provident Fund (Singapore) |
38.0 |
99.0 |
|
Employee Provident Fund (Malaysia) |
33.0 |
134.0 |
| Pension funds |
|
SSS/GSIS (Philippines) |
6.0 |
16.0 |
|
SSO/Civil Servant Pension (Thailand) |
1.3 |
37.0 |
|
All Government Plans (Indonesia) |
5.0 |
15.0 |
| Private pension funds |
5.7 |
18.0 |
| Mutual funds |
20.0 |
81.0 |
| Total |
109.0 |
400.0 |
| Sources: World Bank staff estimates |
Stock market size 1994 
Stock market size 2010 
A gentle push in the right direction
Thailand's central bank governor, Vijit Supinit, explains his country's liberalization philosophy to Brian Caplen What was the impetus for financial liberalization in Thailand?
We could not maintain the banking system in the old form, without reform or liberalization, [if it was going] to support investment and growth in the economy. Therefore, we needed to liberalize the banking system which we did very strongly in 1990. We freed banking activities from a lot of controls and restraints ... interest rates [became] adjustable according to market forces without our own ceilings being imposed. For domestic operations the banks are almost completely free, they are no longer required to hold part of their deposits in government bonds. [It was a 16% requirement in the late 1980s.] Basically, banks are able to do everything except equity trading.
Will banks be allowed to engage in equity trading in future?
Probably not, because we have allowed the finance and securities companies to do that. Trading requires a lot of knowledge and it's quite unstable. Banks would face instability in their operations if this was permitted. Of course banks can have finance companies as subsidiaries and we are now moving to allow larger shareholdings by banks in their subsidiaries - 30% cross-holdings - as we announced late last year. Formerly they were limited to 10%.
What about the finance companies?
They can do almost everything including debt instruments. They will very soon be able to trade foreign exchange. The minister has announced this, in principle, and we are drafting the necessary legal guidelines. Then they will be allowed to carry out all foreign exchange functions, later on offshore banking, and also, very soon, fixed deposits. They have been recently allowed to [issue] bills of exchange for short-term funding; formerly they were only allowed promissory notes, which are longer-term. So they can be more flexible in their fund-raising.
We are also encouraging the finance and securities companies to separate, with the securities companies still able to be held 99% by the finance companies, but we would prevent finance companies using funds in securities operations. Those which are separated, and so far only eight or nine have done so, will be able to apply for current account functions. Once that is allowed they will be fully functioning commercial banks. This is a programme to restructure the finance company sector to [give them the status] of commercial banks.
The impact of liberalization has been loan growth in the economy. Would you agree that the macroeconomic challenges you face now are due to liberalization?
Totally, but I think this restructuring has long-term benefit for the banking system because it increases efficiency and lowers overall costs. Competition will be stronger and, eventually, we foresee mergers taking place in this sector and larger organizations emerging. I would especially expect this after the latest announcement by the minister that tax problems for mergers, particularly the business tax when mergers take place, will disappear.
[Macroeconomic] difficulties also arose when we liberalized foreign exchange. The only [restriction] we have remaining is the export of capital. We freely allow the export of capital for direct investment, in fact a lot of investment has been flowing out of our country into newer emerging markets, particularly China, Laos, Cambodia, Myanmar and Vietnam. The difficulty is in that area [foreign exchange liberalization] more than in the banking liberalization ... The problems we faced last year came from very large inflows of capital. The globalization process is the main factor that makes the economy much more difficult to control because the basic instruments, like open-market operations, need to be developed. At the same time there must be development of the debt-paper markets and, in fact, these have been growing very fast in the past two years because businesses which are not borrowing from the world market are borrowing in the debt-paper market ... but since capital inflow last year was very substantial we cannot neutralize it. That's why we made it very clear we are shifting the emphasis of policy to short-term capital inflows.
But the banks seem to be carrying the burden of your policies.
[The measure we have taken on reserve requirements on short-term foreign borrowings, consisting of 7% all in cash] represents a very early stage in the regulation of capital inflows. It's a very gentle treatment because the costs will only increase by about 0.6% to 0.7%, but it makes borrowing of that kind come closer to world market rates. It's a kind of gentle discouragement. Basically this is the first attempt to look at the use of short-term capital in an extensive way.
Banks with Bangkok International Banking Facility licences may feel they were attracted to Thailand because of its liberal markets and now you seem to be backtracking?
BIBF is supposed to be offshore banking. We allow them to do onshore banking, which no other market except Hong Kong allows. Singapore and Malaysia don't allow onshore banking. But onshore banking is growing very fast. Forty per cent of capital inflows come through offshore banking. We have just made some guidelines, which will still permit a lot of work onshore, even though offshore banking is supposed to be offshore. We would like to have some more balance. We would like to develop other businesses such as foreign exchange, not just lending. We would like to see foreign exchange move in the same direction as in Hong Kong and Singapore. We have made it clear to our own banks that we would like to see them operating more in foreign exchange, currently 80% of the business is in the hands of foreign banks. They have not been developing in this area, which we would like them to do. We are prepared to place our foreign exchange reserve holding in their accounts at the rate we place them in top banks in the world.
Also syndicated loans.They have not developed syndication business, although we made it clear to them that we would promote everything in this direction, as fast as possible. We also announced that three banks coming into the syndication business will be exempt from all kinds of taxes. We want to have some balance. When it goes too much in one direction, which also affects our economy, we have to put in place some guidelines.
The deal in Thailand seems to be that if the foreign banks develop these kinds of activities
they will be rewarded with branch licences?
Probably in May we shall announce [approval for] seven full branches, which is very quick. We have 14 already. We have 21 offshore units of foreign banks so seven of them is one-third. You know, the market here is very big, the largest economy in Asean. The business is big. And when they have almost full access to the fast-growing domestic market, we interpret that to be a very liberal system. We do not behave like some other monetary authorities, calling foreign banks in all the time to give them advice.
Why not float the currency?
We study the [exchange rate mechanism] all the time [and consider] the need to adjust the system. But you probably understand that, in the past, the market has been very sensitive to any mention of exchange rate movement. We started to employ a flexible exchange rate in 1978, and in 1984 we began using the present system of a currency basket. From that point we have not adjusted the basket of currencies and we follow the formula very strictly. The basket was based on the use of currency in trade and settlement, in settlement the use of the dollar is 90%, although in trade it's much less than that, so it's a compromise between the two sides ... We are looking at it all the time and we also compare our experience with other places in a similar situation such as Hong Kong. Hong Kong is a classic situation. It is 100% dollar-based even though they are much more developed in their financial markets, but, because of public sentiment, something has to be used as the anchor to prevent the market from getting frightened. Here, too, our financial system is not as developed as in Singapore or Malaysia, where they have been using a more flexible system for a long time and where their exports are based on imports, whereas our exports are based on domestic raw materials. Of course, when the time comes - when we see the benefits of more flexibility in the exchange rate regime because of the use of imported inputs or because of the need to look at capital inflow problems - we may come to the point where we have to use more flexibility in the exchange rate. This time we are controlling capital inflows through other measures which have been in place for a long time in most of the countries around here. We have the most liberal system in the area.
You recently came to an agreement with other Asean countries on emergency currency support. Why was this?
We have talked to each other for years on many issues. Following the Mexican experience we feel we have to provide each other with more concrete financial support. That's why we launched the bilateral repo agreement.
Will other countries join the agreement?
We are talking with Japan, and we have discussed this with China, so the expansion is taking place. It's just a matter of time. In principle, there is no problem. We have already started exchanging notes on the final details with one of these countries. We also have an Emeap [Executive Meeting of East Asia and Pacific Central Banks] meeting in Tokyo in July [where this might be discussed]. Within a year of the Mexican experience, we have come very far ... Working groups have been set up to see how we could cooperate in three or four central banking operations: clearing arrangements, currency support and banking arrangements similar to the way the BIS [Bank for International Settlements] has served us in the past. The Emeap meeting will be the first one at governor level and will review working group suggestions on how to cooperate closely in concrete terms in these areas. The idea of moving into a multilateral arrangement like the BIS is quite natural here. To have another organization in this area is not unreasonable because most of the [world's] foreign exchange holdings are here so we could support the operation quite effectively.
Will Thailand be liberalizing further?
We are going to promote capital export even more than now. We are doing that already in terms of direct investment. We aim to do much more because our foreign exchange holdings are growing very fast. Now they are $39 billion and we see them growing to between $43 billion and $45 billion by the end of this year. That is within the top 10 [countries in the world]. Twice the size of the holding of Australia or Canada and more than the UK or France. That's why we need to liberalize even more through export of capital.
Will you permit export of capital for portfolio investment?
We shall be doing that in a limited way through such things as floating of shares here and cross-listing of shares from outside, particularly projects in which Thai nationals are involved. But it will take time because people here cling to the idea that we are a poor country, short of savings.
|