Asean Financial Integration: Opportunities, Risks,And Challenges

ASEAN economies have become more financially integrated over the past decade. Both de-facto integration and regional agreements under the ASEAN Economic Community (AEC) have resulted in increasing financial links among countries in the region. Regional initiatives in financial services liberalization, capital market development, and capital account liberalization have also been contributing to the deepening of regional financial markets. In fact, by end-2015, ASEAN countries have completed 87% of all measures under the AEC Blueprint, to achieve free flow of services and freer flow of capital in the finance sector. However, while regional financial integration is clearly increasing, ASEAN economies seem to be more integrated with global financial markets than with their regional neighbors, as suggested both by quantity-based and price-based measures of integration. This is due to limited opportunity for risk diversification within the region, absence of adequate liquidity, lack of adequate financial infrastructure links, and gap in regulatory quality among countries particularly the need to harmonize/maintain minimum standards and regulations. Thus, to further deepen financial integration in ASEAN, it is crucial that: (a) policies that promote the development of financial markets should continue to be a priority; (b) ASEAN should aim to strengthen the implementation of programs at the national level; (c) monitoring of regional financial integration should be pursued with greater urgency; and (d) since regional financial integration is not an end by itself, but a policy instrument designed to achieve development goals, greater macroeconomic and policy coordination is needed.