Speech by Mr Tharman Shanmugaratnam, Deputy Prime Minister & Minister for Finance at the Opening of the Inaugural Network ASEAN Forum
Speech by Mr Tharman Shanmugaratnam
Mr Patrick Walujo, Chair of the Network ASEAN Forum
Members of the ASEAN Business Club Advisory Council
Distinguished guests, ladies and gentlemen
1. I am pleased to join you today at the inaugural Network ASEAN Forum (NAF). Allow me to begin by thanking the CIMB ASEAN Research Institute (CARI) and the ASEAN Business Club (ABC) for bringing us together in Singapore for this first meeting of the NAF.
2. The theme for today’s discussion, “A Strategy for ASEAN”, is apt. ASEAN countries are at an important crossroads, both as individual nations and collectively as a region. I would like to take this opportunity to share some thoughts on the challenges and opportunities we face in the region, and the directions we can take to sustain growth and job creation, as well as maintain macro-economic stability.
Immediate challenge – the expected unwinding of QE in the US
3. Let me touch briefly first on the immediate situation which is something many of us here are watching very carefully. The Fed’s announcement that it could begin tapering off the pace of quantitative easing (QE) as US economic conditions improve was not unexpected. The current volatility in financial markets underscores the need for the tapering process, when it occurs, to be gradual and managed very carefully. But there was never a realistic prospect of a smooth and easy exit from QE. Financial volatility is likely to recur from time to time, given the markets’ tendency to anticipate and front-run monetary policy moves.
4. The tapering of QE and tightening of US monetary policy, when it eventually occurs, will not be a bad thing for the region’s economies. It is not in anyone’s interest, including the emerging economies, for very low global interest rates to continue indefinitely. Low or negative real interest rates have inevitably led to a search for yield, and a build-up of financial imbalances in Asia.
5. The unwinding of QE would also take place together with a recovery in the US, and is not in itself a negative for ASEAN countries. Growth among ASEAN countries has stronger structural underpinnings than in most other regions. Further, the risk of balance of payments crises in the region is relatively low. ASEAN countries have come a long way since the Asian Financial Crisis. Foreign currency debt levels are now much lower, and official foreign reserves much higher. Most ASEAN countries have shifted towards more flexible exchange rate regimes, which has reduced the risk of over-valued currencies and a sudden re-pricing of foreign currency debts. Financial regulatory and supervisory regimes are also now more robust, and bank’s capital buffers are adequate. The non-financial private sector too in ASEAN countries generally have healthy balance sheets.
Long term challenges – responding to a new global environment
6. Some ASEAN countries, like others in Asia, are putting into place immediate measures to calm the markets. However, the key to maintaining confidence in our economies must be to reinforce the fundamentals that support growth over the longer term. Our main priorities have to lie in improving the climate for long-term investments and building up skills and capabilities to drive growth and keep creating good jobs over the medium to long term.
7. In this regard, we have to recognise that the external environment for ASEAN countries will very likely be less supportive in the next five years and possibly beyond. First, there is a real risk of prolonged slow growth in the advanced world, even with recovery from the recession.
8. The US, still a major market for ASEAN, may see relatively low growth for some years. The long-run potential growth rate in the US is viewed by several economists as having fallen to around 2% or lower, compared to 2.5% in the past. Productivity growth has slowed, and will likely be weighed down in the coming years by the lower corporate investments in recent years, including in the recovery to date. Investments in R&D and innovation in particular have been weak. Further, the skills of those who have been unemployed for a long while would also have been eroded – almost half of those unemployed in the US have been out of a job for over six months, and many for over a year.
9. The Eurozone has the same difficulties in productivity growth and a loss of skills, but also more fundamental challenges. It is past the worst and there are signs of a gradual recovery, but there are no easy solutions that will bring growth back to its potential anytime soon. Japan on the other hand is recovering well. But it is too early to tell if structural reforms to liberalise the economy and put public finances on a more stable footing will be implemented as planned and lead to sustained growth. In the meantime, the weaker yen also limits the positive spill-over effects of a Japanese recovery for our region.
10. Overall, we have to expect subdued growth in the advanced world as a whole. The second major factor is China. China is shifting to a lower gear as demographic constraints begin to bite and as its new leadership addresses long-awaited structural reforms. While China’s restructuring holds significant opportunities for us – I will come back to this later – it also poses several challenges. China’s move up the value chain in manufacturing will mean greater competition for some ASEAN countries, especially if we stand still. China’s rebalancing from investment-oriented to consumption-led growth also heralds the end of the commodity “super-cycle”. The end of the boom in commodity prices increases the need to diversify our economies in ASEAN.
11. Third, global interest rates are likely to move higher over the next decade. This is not merely due to the gradual tightening of monetary policy in the US and elsewhere, but to structural factors and especially demographics. Ageing populations in the advanced world as well as China will increasingly limit the global savings pool at the same time when the demand for investments takes off in more developing economies. Without the advantage of low interest rates, policy actions are needed to improve the business environment and ensure adequate incentive for investors.
12. Fourth and last, there are also emerging trends in technology, particularly in robotics and additive manufacturing, and in energy costs with the rise of shale gas that will lead to new supply chains and new patterns of investment around the world. For example, international companies may re-shore certain manufacturing activities, or relocate them closer to final consumer markets in the developed world.
Refocusing our policy directions
13. Taking these trends together, we are therefore facing a significant change in our economic environment, a significant change that we would have to live with over the medium term, and perhaps longer than that.
14. It is therefore important for each of us to explore and open up every new opportunity for growth both domestically and regionally. Let me highlight four key priorities, each of which offering real prospects for improvement in the region’s growth.
15. First, we have to open up further, and create conducive conditions for private investment to grow.
16. Unlike China, which is shifting from investment to consumer-driven growth, ASEAN’s challenge is opposite – to rebuild investment levels. Investment rates remain well below the levels prevailing in the pre-Asian Financial Crisis years, notwithstanding a recent upswing. While it is probably true that there was over-investment before the Asian crisis when investment rates were running at about 33% of GDP (or over 40% in some individual economies), the current rates among the emerging ASEAN economies, averaging 25%, are lower than would be expected at their current stage of development.
17. Consumption remains a valuable source of growth in ASEAN economies, driven by an expanding middle-class. But the region’s average consumption ratio is already quite high, at about 60% (of GDP). To raise potential output growth and hence provide jobs for a young and rapidly-growing labour force in the region, we have to focusing on getting investments back up. This includes a more determined effort to remove impediments to long term, infrastructural investments.
18. It also includes, in some of our economies, reforms to allow labour markets to work more flexibly, and hence enable better employment creation in the formal economy. Flexible labour markets will also help ensure that wages grow in line with productivity over the medium term, and ASEAN’s economies remain competitive.
19. This brings me to the second priority, which is to invest in raising productivity. This is in fact a real opportunity in ASEAN. Productivity levels in ASEAN economies (excluding Singapore) range from 5% to 35% of the level in the US. There is tremendous scope left for convergence with the advanced world.
20. But convergence never occurs automatically. From the experience of the Asian NIEs, and before them Japan, the catch-up in productivity will be aided by expanding sectors such as manufacturing and tradeable services to absorb surplus labour from less efficient agricultural and rural activities. It also involves, in each and every sector, investing in technology and skills, and strengthening communications and other infrastructure.
21. A third priority in ASEAN is to ensure we can take advantage of opportunities in China’s evolving economy. China’s wages are rising rapidly, and will alter the Asian manufacturing supply chain. Some ASEAN economies with relatively low labour costs will benefit by taking over some segments of this supply chain. At the same time, there will be growing demand for higher value, more sophisticated products to cater to the rising middle class in China, even as Chinese producers themselves move up the same value curve. A new wave of growth in services is also expected in China, as it shifts from an investment-led economy to one driven by consumption, urbanisation and environmental concerns.
22. To take part in this new China, we will need to develop new capabilities, and meet the competitive pressures as China itself moves up the value curve.
23. In short, ASEAN is facing a twin challenge – on the outside, an adverse shift in external demand, and internally, supply-side and capability gaps that have to be addressed boldly, so that the region can grow at its full potential. Each of us will have to think hard about the structural reforms that are needed, in education and skills training, legal and regulatory frameworks for investors, and labour markets.
24. I should emphasise that we are not starting from a bad point. ASEAN countries have outperformed many or their emerging market counterparts in other regions. For instance, the Philippines has become the largest call centre in the world, and has also established itself as the world’s fourth largest shipbuilder. Car production in Indonesia has grown by more than 50% over the last three years. By leveraging off its huge domestic market to gain economies of scale, Indonesia is acquiring a competitive advantage in the automobile industry.
25. But we have to go further. It is the reality of economic life that each time you reach a higher level, the need for institutional reforms becomes more complex. Deeper institutional reforms are required if ASEAN is to move from comprising low and middle-income countries to being middle and upper middle-income.
Harnessing opportunities in regional integration
26. Let me come to the fourth priority, which is to accelerate regional integration in ASEAN. This is in many ways an enabler for the other three priorities. We have huge opportunities to be developed through intra-ASEAN trade and investment.
27. While import tariffs on goods have in most part been eliminated, intra-ASEAN trade still has much scope to grow as non-tariff barriers including quotas as well as complex customs and import licencing procedures are reduced or streamlined, and as services sectors are liberalised under the ASEAN Economic Community (AEC) blueprint.
28. ASEAN’s efforts to boost cross-border transport links under the Master Plan on ASEAN Connectivity (MPAC) will also complement trade integration and reduce costs. One such example is the “completion of the Singapore Kunming Rail Link (SKRL) Missing Links”. (The completion of about 4,000 kilometres of missing links in the Indochina region will see a complementary mode of land transportation eventually connecting Singapore, through Malaysia, Thailand, Cambodia and Vietnam, to southern China.) Most of the measures for the SKRL Missing Links project are underway, with ongoing feasibility studies and funding arrangements being worked out.
29. The benefits from trade creation and increased investment often also provide impetus for structural reforms at home, which will inevitably face resistance from vested interests. We have seen this positive feedback between regional integration and domestic reform in other regions. Within ASEAN, the AEC has played a useful role in reshaping policy debates at home and helping to align domestic regulations with regional commitments, such as those reflected in the goods, services and investment agreements in the AEC. Further, by growing the overall regional pie, difficult domestic tradeoffs can become more palatable.
30. ASEAN countries have made significant progress in harmonising standards and regulations, which have lowered costs for businesses and reduced the time-to-market in sectors such as electronics, electrical equipment, medical devices and pharmaceuticals. We must ensure similar progress in services liberalisation.
31. Going forward, we have set our sights higher with the Regional Comprehensive Economic Partnership (RCEP), which will comprise ASEAN and our six ASEAN FTA partners – China, Korea, Japan, India, Australia and New Zealand. The RCEP will link up ASEAN’s trading partners, several of whom do not have existing trade agreements with one another. Our vision is to achieve a modern, comprehensive and high quality agreement, with significant improvements over current ASEAN+1 FTAs. Together with the Trans-Pacific Partnership (TPP), the RCEP could provide a possible pathway to an Asia-Pacific FTA.
32. In short: we have to intensify efforts to deliver our AEC commitments on schedule and begin scoping out the work for future regional economic initiatives post 2015.
Financial markets as an enabling factor
33. Let me finally say a few things about the prospects for integration in financial markets.
34. Building greater depth and breadth in regional financial markets is a critical enabling factor in achieving our goals to boost investments at home, as well as to expand intra-regional trade and investment.
35. Deeper and wider markets, by boosting liquidity and competition, will help to reduce funding costs at a time when interest rates are likely to normalise and rise globally. Corporate bond markets in particular will offer needed diversification for Asian businesses. We also need to develop securitisation markets, with appropriate safeguards, so as to tap broader investor pools as well as allow banks to recycle their capital and invest in new projects.
36. The integration of financial markets within ASEAN and Asia, would also strengthen our individual and collective resilience to external financial shocks, compared to each national market standing on its own, smaller and less liquid.
37. Our regulators are working actively to harmonise rules and market practices across the region, to encourage cross-border flows while mitigating the risks that could arise from them. More too is being done to boost linkages between our markets and economies, and pool liquidity across our markets. Let me mention three examples of these initiatives:
- An example is the ASEAN Trading Link, launched last year by the stock exchanges in Malaysia, Singapore and Thailand, which allows investors in any participating country to trade securities in the other two markets through a single access point. We can expect other regional stock exchanges, e.g. from Indonesia, Philippines and Vietnam, to join in later. The ASEAN Finance Ministers also agreed in April this year to develop “post-trade linkages” for clearing, settlement and custody to support and enhance the value of the trading link.
- Another example is the mutual recognition framework for mutual funds (or unit trusts), which will allow funds established in one ASEAN country to be offered to retail investors in other participating ASEAN countries under a streamlined authorisation process, as long as they satisfy a set of eligibility criteria and are well-managed. Once implemented, fund managers will be able to market their funds to other ASEAN markets, while ASEAN investors will benefit from a wider choice of products. Like the ASEAN Trading Link, we expect several countries to implement this first, with others to follow later.
- A third example is the common prospectus framework for securities offering, which would make it easier and less costly for companies to raise funds across the region by allowing the use of a single prospectus. The first phase of this effort was recently completed when Malaysia, Singapore and Thailand implemented the harmonised ASEAN Disclosure Standards for prospectuses in April 2013. Regulators are now developing a framework that will streamline the approval process for prospectuses across ASEAN countries so that the time needed for listing in multiple markets will be the same as listing in one market.
38. I am optimistic about ASEAN’s prospects.
39. We are at a good starting point. We are also in the right part of the world where there are significant growth opportunities not just domestically but also to be achieved through greater regional integration. While our external environment has gotten tougher, it is a useful reminder that our domestic and regional fundamentals have to be enhanced if we wish to offset negative spill-over effects, and in fact improve our growth performance.
40. I am optimistic because we know what the weaknesses are, and their solutions; because we have a valuable asset in our openness and ability to cooperate and collaborate with each other as a region; and because of proactive private sector efforts such as the NAF that seek to work alongside ASEAN governments to realise our vision of an ASEAN Community.