PETALING JAYA: The success for capital markets under the Asean Economic Community (AEC) will be heavily dependent on populous Indonesia being ready to participate in an ambitious integration that envisions a single market and production base in the region.

The arrival of the AEC on Dec 31, 2015, in theory, should simplify trade and investment between member nations, and help make it a major global economic player.

But the readiness of Indonesia to embrace AEC, especially in the area of capital market integration, has been a question.

Making up roughly 40% of the region's US$2.1 trillion economy, Indonesia is by far the biggest and most impactful player in the 10-member AEC. Its reluctance to open up the economy further has drawn concerns on the success of the AEC.

In terms of the Asean Capital Markets Forum (ACMF) under the AEC, a critical component is for the development of a deep, liquid and integrated capital market, to enable freer flow of capital across the region.

This will also raise the profile of Asean as an asset class and attract greater international investment into the region.

So far, only three countries - Thailand, Singapore and Malaysia - have joined the trading link.

The overall objective of this link is to provide investors in Asean an easier and seamless access into the region's markets from one single access point. Indonesia is not part of the link yet.

CIMB group chairman Datuk Seri Nazir Razak said that in his opinion, Asean was nothing without Indonesia - the largest economy.

"The world acknowledges the importance of Indonesia by its inclusion in G20. Every Asean initiative must include Indonesia, or at least have a timeline for Indonesia's inclusion. And therein lies one of my major concerns for AEC.

"Economic nationalism in Indonesia is on the rise, partly because of fears about AEC, and if the new Joko Widodo administration chooses to pander to this sentiment, then I would turn bearish about AEC's prospects," said Nazir.

The banker, who wants to see the group become a truly Asean financial group, said that Indonesia's reluctance was telling considering that the country was not part of the Asean trading link.

"It does provide an alternative means for investors to trade across exchanges. But this is already available through regional brokers and inter-broker transactions.

"There is a need to understand Indonesia's reluctance, what it means on the broader level in terms of its real commitment to AEC and what can be done about it," said Nazir.

In general, Indonesia still has reservations on the market-integration plan, mainly because its infrastructure is not up to mark with the rest of the region.

In Indonesia, one of the main problems is that the law does not accommodate foreign firms from entering its bourse for a listing.

Right now, foreign companies are not able to list on the Indonesian Stock Exchange because there is no supporting regulation and thus, cross-border offerings are not allowed.

As this involves a law, it becomes a political matter, and hence will take time to change and enact.

A clear development of Indonesia not participating in the AEC is when it opted out of the Asia Region Funds Passport (ARFP) initiative last August.

This is an initiative under the Asean Collective Investment Scheme (CIS) framework which allows fund managers operating in a member jurisdiction to offer CIS constituted and authorised in that jurisdiction to retail investors in other member jurisdictions under a streamlined authorisation process.

Six countries - Australia, South Korea, New Zealand, the Philippines, Singapore and Thailand - have committed themselves to the implementation of broader cross-border offering of CIS under ARFP.

Indonesia has opted out because of the lack of domestic infrastructure and the relative inadequacy of its funds industry.

These factors have also added to the authorities' inability to regulate.

"While the necessary trading infrastructure is already in place, the next challenge is attracting greater transaction volume and scale that would also enhance the attractiveness of this proposition to other Asean member countries," said Securities Commission (SC) chairman Datuk Ranjit Ajit Singh.

Ranjit said for the Asean investment value proposition to be realised, it was imperative for all member countries to be on board, with the participation of major regional markets being a particularly crucial success factor.

"At the same time, we also recognise the different stages of market development within the region and how policymakers must strike the right balance among important domestic priorities before they are ready to provide stronger commitment at the regional level," he said.

Recognising the challenges posed by this balancing act, Ranjit said the ACMF had worked and would continue to work with individual member countries on specific areas, particularly capacity-building, to assist in the implementation of the necessary preconditions for regional market integration.

As of Sept 2014, the SC has taken over as the chair of the ACMF.

By TEE LIN SAY

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