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ASEAN Economic Community One Vision, One Identity, One Community

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ASEAN ECONOMIC COMMUNITY...


ONE VISION, ONE IDENTITY, ONE COMMUNITY.

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by Mr Eli Shoshani (Head of APAC, D+H)

ASEAN Economic Community


Challenges of the AEC
Beyond the AEC

Impact of the AEC

Impact of Travel and Tourism


Impact on Banking
Impact on Currency
Impact to Corporates on Payments
Impact on SMEs

Conclusion

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ASEAN Economic Community

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In 20035, 10 countries wanted to take the European Union idea and adopt it to the ASEAN region, in the

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form of the AEC. They aimed to have One Vision, One Identity and One Community. The ASEAN community

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has large economic potential, with the third largest labour force in the world behind China and India, and

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is similar to the size of the EU. The AEC will be effective from 31st December 2015. Cambodia, Laos,
Myanmar and Vietnam will join in 2018.

The AEC will bring about five major benefits, mainly:

1) Tariff elimination and the free movement of trades and services between countries
2) Easy movement of capital and funds
3) Easy movement of skilled workers (Eg. Teachers, doctors, lawyersEg. Engineers, tourism professionals,
surveyors, accountants, nurses and doctors)
4) Streamlined customs clearances

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Supportive for inward Foreign Direct Investment

These benefits will be more applicable to the heavy lifters in the ASEAN region, mainly being Indonesia,
Thailand, Malaysia, Singapore and the Philippines. The aim of the AEC is to increase trade between these
ASEAN countries, and to increase the share of global output from 3.1% 3.9%.

Challenges of the AEC


It is difficult to bring together 10 different nations to form one single community. Between these 10
countries, there are varying levels of economic progress, which poses a difficulty to smooth integration.
One simply has to look at the challenges that the EU has faced (For example, the situation in Greece) to see
how this may pose an issue in the future. Cultural and social differences between the nations may also
result in tensions and political issues. In the past few years in ASEAN, there has been conflicts, nationalistic
and protectionist moves taken by individual nations, as they try to push an agenda without theat the
expense of true spirit of cooperation. The language barrier still remains a major hurdle. Hence, it will take
time, potentially 5-10 years before the AEC goes into full motion, and for the benefits can to be fully
experienced. There is also the issue of the other Asian superpowers (China, Japan, Korea) as well as
neighboring economies like Australia and New Zealand, and the roles that they will play in this region.

Beyond the AEC


It is important to establish trade agreements between the other important trading partners, on top of the
AEC. ASEAN is the 3rd largest trading partner for China, after the US and Europe. Hence, it is not
possibleunavoidable for China to not to be involved in the AEC. China has already reduced tariffs on many
products that are traded between the ASEAN region. Trade between ASEAN and India has also been
extensive, hence this also cannot be ignored. Similarly, Japan, Australia and New Zealand have also been
major economic partners of the ASEAN region, and hence the AEC will change the flow of trade and the
supply chain within the Asia Pacific.

Impact of the AEC

Impact of Travel and Tourism


Today, it is not easy for, say, Singapore Airlines to increase the number of flights they want to send to with
as there is too- much regulatory action that needs to take placewe cant avoid the play of protection.
potentially allow almost unrestricted access for ASEAN airlines to fly to all ASEAN countries, or between 2
other ASEAN countries. In addition, a single VISA can be used for travel between these countries, taking

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away a lot of cumbersome application procedures. This would help to boost tourism between the nations,
allowing the tourism numbers in ASEAN to continue to grow.

Impact on Banking
The AEC would not require a central bank, or a single currency. Instead, national central banks and financial
regulatory authorities will need tohave agreed on the standards for Qualified ASEAN Bank. Hence, each
nation will continue to have its own interest ratecurrency, and its own central bank.

Every yearPotentially, 2 or 3 banks within each country will become a Qualified ASEAN Bank (QAB), that
will be able to qualify other banksoperate as local banks outside their own country. This will allow banks to
operate and cooperate with other banks in other different nations. This would create a level playing field,
as a smaller bank (in a smaller country) would then be able to expand more easily to other nations. This
would support the long-term growth of ASEAN banking institutions, and is expected to help boost
competitiveness against foreign banks outside that of the ASEAN countries.

It is possible that banks may start forming alliances. There is discussion between banks to start to
cooperate. We already see this in the form of correspondent banking. For example, Myanmar banks offers
branch and ATM network services to foreign banks, such as ANZ.

Impact on Currency
Without the single currency, the ASEAN economy will not be able to achieve price stability, lower costs,
and reduce the risk of cross-border business through the elimination of currency risk. However, it seems to
be infeasible to set up a single currency in the ASEAN region, as the vast income differences and differences
in monetary policies are too significant. The single currency for ASEAN remains a distant target for now.

Impact to Corporates on Payments


Banks are not yet ready for a single currency. Not all ASEAN countries have Real Time Gross Settlement
infrastructure. Different formats in messaging standards make it difficult to communicate. There needs to
be the same infrastructure and the same language for banks to be able to communicate with one another
and work together. This would be the first step for banks. The 5 largest members of ASEAN have agreed to
implement an integrated payment system to enable RTGS systems. This allows automation for cross-border
payments, and individual users across ASEAN will be able to make financial payments through ATMs, credit
cards, or electronic money without spending a significant amount of time or money doing so. Will the AEC

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Copyright 2015 by Singapore Management University. All Rights Reserved.

be able to experience the same cost savings that the EU managed to experience without the central bank
and the single currency?

Impact on SMEs
Singaporean companies operate in many different countries, and needs to find ways to move their goods
and capital in more efficient ways. Customs and regulatory issues are a major hurdle for SMEs to conduct
businesses in different regions. With the AEC, this would help reduce the costs for SMEs. However, this
would mean increased competition with the foray of foreign firms.

There is also the chance that SMEs in Singapore would now be able to go to other nations, such as Vietnam,
to borrow money at low interest rates, which has the potential to result in politics among local banks.
However, Singaporean banks would also now be able to establish banks in these other nations, and
compete at similar interest rates. On the other hand, other banks can also open in Singapore, and compete
with with the local banks there. Furthermore, this is not easy as cross-border lending remains complicated,
and not straight-forward.

Conclusion
It is not going to be an easy ride for nations and businesses involved in the AEC, but hopefully the economic
benefits for individuals, such as the easy transport of goods and services between nations, as well as the
vast business opportunities for Corporates within a single large community, will make it worthwhile.

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Copyright 2015 by Singapore Management University. All Rights Reserved.