Financial and Capital Market Developments in the ASEAN

1. 37th Federation of ASEAN Economics Association (FAEA) Annual Conference PICC, 29 November 2012 Financial and Capital Market Developments in the ASEAN DIWA C. GUINIGUNDO Deputy Governor Monetary Stability Sector

2. Outline • Overview of ASEAN Financial and Capital Market Integration • Status and Progress of Financial and Capital Market Development and Integration • ASEAN and Other Regional Finance Cooperation Initiatives • Issues and Challenges

3. Outline • Overview of ASEAN Financial and Capital Market Integration • Status and Progress of Financial and Capital Market Development and Integration • ASEAN and Other Regional Finance Cooperation Initiatives • Issues and Challenges

4. Overview of ASEAN financial and capital market integration Rationale for capital market development and integration • Strengthen financial intermediation, capacity, and risk management to support national and regional growth • Cooperate to reduce vulnerabilities to external shocks and market volatility • Contribute to financial stability by facilitating diversification and reducing domestic volatility resulting from global shocks • Address growing competition from global players, and the pressures for consolidation and efficiency enhancements

5. Overview of ASEAN financial and capital market integration The AEC Blueprint aims to achieve freer flow of capital through: • Greater harmonization in capital market standards • Facilitating mutual recognition arrangements or agreements • Achieving greater flexibility in language and governing law requirements for securities issuance • Enhancing withholding tax structure to promote the broadening of investor base in ASEAN debt issuance • Establishing exchange and debt market linkages, including cross-border capital raising activities

6. Outline • Overview of ASEAN Financial and Capital Market Integration • Status and Progress of Financial and Capital Market Development and Integration • ASEAN and Other Regional Finance Cooperation Initiatives • Issues and Challenges

7. Trade integration Intra-ASEAN Trade has increased through the years… Intra-ASEAN Exports and Imports Intra-ASEAN Trade Share (as % of total trade) Source: ARIC ADB

8. Trade integration • The Philippines trade intensity index vs ASEAN has grown from 2.2 in 1990 to 3.2 in 2011 • Trade share of ASEAN to Philippine total trade has risen from 9.3 percent to 21.1 percent from 1990 to 2011 Source: ARIC ADB

9. FDI integration • Foreign direct investments from ASEAN region to the Philippines has declined from 1997 levels while inflows from the World has generally increased from the same period Source: ARIC ADB Source: ARIC ADB

10. Growing portfolio investment assets to ASEAN Source: ARIC ADB citing IMF Coordinated Portfolio Investment Survey

11. Rising local currency bond issuance ASEAN+3 Local Currency Bonds Outstanding

12. Lending rate differential • Banking market integration is a work in progress • From 12.2 percentage points differential in 2000, the Philippine differential has come down to 7.13 in 2008 (last year data is available) • Singapore has the lowest differential among ASEAN economies that have available data in ARIC database Source: ARIC ADB

13. Asia is fast becoming a regional finance hub… And Malaysia is fast rising as a center of Islamic finance in the region…

14. Outline • Overview of ASEAN Financial and Capital Market Integration • Status and Progress of Financial and Capital Market Development and Integration • ASEAN and Other Regional Finance Cooperation Initiatives • Issues and Challenges

15. Various Regional Finance Cooperation Fora under the ASEAN Finance Process

16. Key Asian capital markets initiatives May be categorized as follows: • Improvements in Infrastructure (e.g., ASEAN Payments and Settlements System, ASEAN+3 Regional Settlement Intermediary, ASEAN Exchange Linkages) • Enhancing Credit Ratings (e.g., harmonization of credit rating standards, ASEAN+3 CGIF) • Harmonization of Rules and Regulations (e.g., ASEAN Disclosure Standards) • Promoting and Developing Capital Market Products (ASEAN 100 FTSE, AFMIS, ASEAN Corporate Governance Scorecard)

17. Key Asian capital markets initiatives • Improvements in infrastructure • ASEAN Payments and Settlements System • ASEAN+3 Regional Settlement Intermediary

18. Key Asian capital markets initiatives Enhancing Credit Ratings • ASEAN+3 Credit Guarantee and Investment Facility (CGIF) • Studies on Harmonization of credit rating standards

19. Key Asian capital markets initiatives Capital Market Harmonization • ASEAN Disclosure Standards • ASEAN Exchange Linkages • ASEAN+3 Bond Markets Forum (ABMF)

20. Key Asian capital markets initiatives Developing and Promoting Capital Market Products • FTSE/ASEAN Index Series • ASEAN Finance Ministers Investors Seminar • ASEAN Corporate Governance Scorecard

21. ASEAN Finance Cooperation Initiatives • ASEAN Working Committee on Financial Services Liberalization (WC-FSL) • ASEAN Working Committee on Payments and Settlements System (WC-PSS) • Task Force on ASEAN Banking Integration Framework (TF-ABIF)

22. Other Regional Finance Cooperation Activities • ASEAN+3 Asian Bond Market Initiative (ABMI) • EMEAP Asian Bond Funds • APEC Capacity Building Programs on Bond Market Development

23. Outline • Overview of ASEAN Financial and Capital Market Integration • Status and Progress of Financial and Capital Market Development and Integration • ASEAN and Other Regional Finance Cooperation Initiatives • Issues and Challenges

24. Issues and Challenges • Wide differences in the levels of financial and economic development • The need for institutions that will champion integration in the national level • Domestic concerns on displacement of businesses

25. Conclusion Is the Philippines ready? • Structural reforms over the years:Investing in the Philippine economy’s future • Reaping the dividends of reforms: stronger macroeconomic fundamentals • Growing third party recognition • Openness to trade: share of ASEAN in PH’s total trade rose from 9.3% in 1990 to 15.5% in 2000 to 21.2% in 2011

26. Structural reforms, 1993-2012:Investing in the Philippine economy’s future 1993-1998 2000-2004 2005-2009 2005: Passage of E-VAT Law 2007: Implementation of risk-based bank supervision 2000: Passage of General Banking Law and Phil. E-Commerce Act 2003: Passage of Special Purpose Vehicle Act 1993: Creation of the Bangko Sentral ng Pilipinas 1997: Privatization of water services 2005: Passage of Securitization Act 2004: Passage of Govt. Procurement Reform Act 1994: Liberalization of foreign bank entity 1998: Deregulation of the oil industry 2008: Passage of Renewable Energy Act 2001: Liberalization of the power sector (EPIRA) 2006: Establishment of the Wholesale Electricity Spot Market (WESM) 1995: Liberalization of telecommunications industry 2009: Passage of Tourism Act 2002: Adoption of inflation targeting framework 2004: Adoption of Basel 2 2010 2011 2012 and beyond 2012: Issued EO 79 Institutionalizing and Implementing Reforms in the Philippine Mining Sector Providing Policies and Guidelines to Ensure Environmental Protection and Responsible Mining in the Utilization of Mineral Resources 2012: Launched Food Staples Sufficiency Program Issued guidelines on the adoption of Philippine Financial Report Standards (PFRS) 9: Adopted phased-immigration to Basel III Applied Zero Based Budgeting Approach in preparing the 2011 Budget Reinvigorated implementation of programs against corrupt officials, tax evaders and smugglers Enhanced Business Name Registration System Passage of the Government-Owned-and-Controlled Corporations (GOCCs) Governance Act of 2011 2012: Nationwide Launch of Philippine Business Registry Facility Implementation by the Bureau of Customs (BOC) of Electronic to Mobile System; Enhancement of the agency’s post-entry audit capability Simplified and shortened business practices through web-based applications at the BIR BOC National Single Window 2012 and beyond Full implementation of the Government Integrated Financial Management Information Systems (GIFMIS) in 2013 Issued EO 29 on Open Skies Policy Set up the Debt Management Office at the Department of Finance 2012: Program Budgeting Approach Launched PPP Program 2012 and beyond: Sin Tax Bill and Rationalization of Fiscal Incentives Bill 2012: Passage of Amendments to the Anti-Money Laundering Act of 2001 Source: Philippine Mid-Year Economic Briefing, 17 September 2012

27. Reaping the dividends of reforms: Stronger macro fundamentals *UBs and KBs **Computation based on the combined reports of parent bank (head office and branches) and its subsidiaries engaged in financial undertakings but excluding insurance; also excludes trust department.

28. Growing third-party recognition • 8 positive rating actions by S&P, Moody’s and Fitch Ratings since June 2010 • Upgrades in 2012 real GDP growth forecasts by WB and ADB

29. Significant gains on governance and competitiveness indicators *2011/2012 vs 2010/2011 for indicators with 2011/2012 data. Source: World Bank, Transparency International and World Economic Forum ¹ World Bank Government effectiveness Indicators and Transparency International values are for the year 2010 / World Economic Forum Competitiveness Rankings values are from the 2011-2012 report. ² Heritage Foundation 2011 ranking. ³ Heritage Foundation 2012 ranking. 4 Environmental Performance Index by Yale & Colombia Universities in collaboration w/ WEF and EC. 2012 report. 5 World Competitiveness Rankings values are from the 2012-2013 report. World Bank Government Effectiveness Indicator value from the 2011 report.

30. 37th Federation of ASEAN Economics Association (FAEA) Annual Conference PICC, 29 November 2012 Financial and Capital Market Developments in the ASEAN DIWA C. GUINIGUNDO Deputy Governor Monetary Stability Sector