Creating an Integrated Market by 2015: Capital Account Liberalization in ASEAN

Transcription

1 Creating an Integrated Market by 2015: Capital Account Liberalization in ASEAN Yung Chul Park, Korea University Shinji Takagi, Osaka University Presentation at the 9 th NIPFP-DEA Research Meeting on Capital Flows, New Delhi, March 2011

2 Introductory Remarks ASEAN is in the process of creating an ASEAN Economic Community (AEC) by 2015 The AEC is a region with free movement of goods, services, investment, skilled labor, and freer flow of capital An integrated financial market requires capital account liberalization (CAL) and financial sector liberalization (FSL) Of the two pillars, this paper focuses on CAL 2

3 What the Paper Attempts to Do Assess the existing state of capital account openness in ASEAN based on information gathered from central banks and a reading of the IMF Annual Report on Exchange Arrangements and Exchange Restrictions Propose broad CAL principles to apply in substantially achieving the aims of the AEC by 2015 (and 2020) 3

4 Assessing the Existing State of Capital Account Openness in ASEAN

5 Capital Flow Freedom Index In assessing the existing state of capital account openness, we use a numerical indicator: Largely a de jure measure (though some elements of de facto openness are incorporated) Largely an ordinal (as opposed to cardinal) measure Designed in such a way that 25 roughly represents de facto financial openness (though 100 represents full de jure openness) The purpose is to help measure progress within each country and to compare de jure openness across countries 5

6 Capital Flow Freedom Index Weights Portfolio inflows 30 Portfolio outflows 30 FDI 6 Current account 15 Personal transactions 10 Freedom to use currency 5 Freedom to hedge

7 Capital Flow Freedom Index Weights The weights are by nature subjective, but we believe they are reasonable The weights for individual measures are much less subjective (they are largely determined by the number of individual measures within each category ) 7

8

9 How the Index is Compared to the Rescaled Chinn-Ito Index

10 The Index is Robust to Different Weighting Schemes

11 Four Types of Countries 1. Singapore (94) and Indonesia (82) 2. Brunei (95) and Cambodia (74) 3. Malaysia (66), the Philippines (60), and Thailand (45) 4. Vietnam (33), Lao PDR (30), and Myanmar (2)

12 Features of the Capital Account Regimes in ASEAN (1) 1. Many retain restrictions on capital flows 2. Controls are tighter on outflows than on inflows 3. All except Myanmar have accepted IMF Article VIII, but many keep current account-related restrictions (e.g., repatriation requirements and payment formalities)

13 Features of the Capital Account Regimes in ASEAN (2) 4. Almost all restrict offshore use of their currencies 5. Many place more restrictions on external borrowing than portfolio inflows; many, including Singapore, restrict external lending 6. Many restrict the ability of investors to hedge risks

14 Features of the Capital Account Regimes in ASEAN (3) 7. Some impose withholding tax on interest income and capital gains from certain types of securities

15 Steps in Formulating CAL Implementation Plans

16 Existing ASEAN Frameworks Any CAL implementation plan must be coordinated with the following existing frameworks: AEC Strategic Schedule, through 2015 ACMF Implementation Plan, through 2015 Working Committee on CAL (WC-CAL) Work Plan, through

17 1. AEC Strategic Schedule (selective measures) Free Flows of Investment Complete Phase I of the progressive reduction/elimination of investment restrictions and impediments Commence Phase II of the progressive reduction/elimination of investment restrictions and impediments Complete Phase II of the progressive reduction/elimination of investment restrictions and impediments Commence the Final Phase of the progressive reduction/elimination of investment restrictions and impediments Complete the Final Phase of the progressive reduction/elimination of investment restrictions and impediments--realize free and open investment regime with minimal investment restrictions; achieve harmonization of investment measures to facilitate movement of investments 17

18 1. AEC Strategic Schedule (selective measures) Freer Flows of Capital Strengthen capital market development and integration Achieve greater harmonization in offering rules, disclosure requirements and distribution rules; facilitate mutual recognition for market professionals; achieve greater flexibility for securities issuance; enhance withholding tax structure; facilitate market driven efforts to establish exchange and debt market linkages Foreign direct investment Progressively liberalize, where appropriate and possible, the pre-identified rules for freer flow of foreign direct investments Continue to liberalize, where appropriate and possible, any other items related to foreign direct investment Portfolio investment : Assess and identify rules for liberalization for freer flows of portfolio investments, particularly in debts and equity : Progressively liberalize, where appropriate and possible, the rules identified for freer flow of portfolio investments Continue to liberalize, where appropriate and possible, any other items related to portfolio investments Other types of flows : Assess and identify rules for liberalization of other types of flows, particularly long-term foreign borrowing and lending Progressively liberalize, where appropriate and possible, the rules identified for other types of flows, particularly long-term foreign borrowing and lending Continue to liberalize, where appropriate and possible, any other items related to other types of capital flows Current account transactions Adopt IMF Article VIII status Remove and/or relax, where appropriate and possible, restrictions on repatriation/surrender requirements Continue to liberalize, where appropriate and possible, any other items related to current account transactions 18

19 2. ACMF Implementation Plan for Regional Integration of Capital Markets (Selective) Cross-border distribution of primary offerings Cross-border distribution of products Facilitate investment by non-retail investors Adopt the ASEAN and Plus standards for cross-border primary offerings Allow distribution of listed products on ASEAN exchanges to non-retail investors Identify restrictions to be removed for non-retail investors; allow cross recognition of ASEAN exchanges Phase out country specific Plus Standards; develop mutual recognition framework for primary offerings Develop harmonized criteria for non-retail investors; remove restrictions that prevent them from investing freely in ASEAN Adopt harmonized ASEAN disclosure standards for primary offerings Develop single passport/licensing for market intermediaries Establish the electronic trading link Identify any policy/legal impediments for cross-border provision of services by market intermediaries Implement ACE bilaterally through a phased approach Develop mutual recognition for products and services by market intermediaries to non-retail investors ASEAN exchanges endeavor to achieve full linkage to ACE gateway Establish mutual recognition for products and services by market intermediaries to non-retail investors; expands mutual recognition to all investors Implement depository linkages When ready, ASEAN exchanges develop depository links Coordinate listing rules Promote regional products and regional market intermediaries Take necessary steps to promote cross listings on ASEAN exchanges Facilitate ratings comparability within ASEAN Harmonize listing rules to lower costs and ensure timely and contemporaneous disclosure by cross-listed entities Design a regional strategy for ratings comparability Allow issuers and investors to freely issue and trade across the region; accelerate the development of regional intermediaries to serve ASEAN investors Strengthen capital income taxation; enhance withholding tax structure to promote the broadening of investor base Analyze differences in national tax regulations and establish best practices for tax system 19

20 3. WC-CAL Work Plan Current account liberalization Achieve IMF Article VIII status Remove/relax restrictions on repatriation/surrender requirements Continue to liberalize current account transactions Foreign direct investment Liberalize the identified list of rules Liberalize the identified list of rules Further liberalization Portfolio investment: debt and equity : Assess and identify rules for liberalization : Liberalize the identified list of rules Further liberalization Other types of flows: longterm foreign borrowing and lending : Assess and identify rules for liberalization Liberalize the identified list of rules Further liberalization 20

21 Coordination With Existing Frameworks The ASEAN Strategic Schedule is too general to be of practical use WC-CAL Work Plan still at an early stage, hence of little practical use at this stage (lists of specific rules are being prepared by national authorities) ACMF Implementation Plan principles of harmonization and mutual recognition to promote regional flow of financial products 21

22 Principles of Sequencing The conventional wisdom is that outflows should be liberalized after inflows The conventional wisdom does not apply to ASEAN because financial integration is a twoway process Outflows must be liberalized early in the process to facilitate financial integration The principle of mutual recognition can be invoked to promote outflows (within the region) without violating the global rule of nondiscrimination while containing risk 22

23 Principles of Sequencing (Continued) 1. Current account and FDI related measures should be liberalized immediately 2. Inflow measures should be removed given the high degree of de facto openness (usually through purchases of domestic securities by nonresidents), removing impediments to inflows should not necessarily create additional risks 23

24 Principles of Sequencing (Concluded) 3. Outflow measures to be removed first with respect to other ASEAN countries, through mutual recognition principle; eventually to all countries; distinction can be made between nonretail and retail investors in specific instances 4. Creating enabling environments, including ease of using currency; ease of hedging; and removal of withholding tax; freedom of personal transactions this can come at a later stage or not at all 24

25 Brunei (95) Current account and FDI related Eliminate payment formalities for invisibles Portfolio inflows Portfolio outflows Other flows Other measures Rationalize withholding tax for foreign investors subject to mutual tax arrangement Rationalize withholding tax for all foreign investors

26 Cambodia (74) Current account and FDI related Eliminate payment formalities for invisibles Portfolio inflows Portfolio outflows Other flows Other measures Rationalize withholding tax for foreign investors subject to mutual tax arrangement Rationalize withholding tax for all foreign investors

27 Indonesia (82) Current account and FDI related Eliminate payment formalities for invisibles Portfolio inflows Portfolio outflows Other flows Other measures Rationalize withholding tax for foreign investors subject to mutual tax arrangement Rationalize withholding tax for all foreign investors

28 Lao PDR (30) Current account and FDI related Eliminate repatriation/surrender requirements for export proceeds as well as payment formalities for invisibles (i) Eliminate surrender requirements for FDI inflows; (ii) substantially liberalize FDI outflows Portfolio inflows Allow resident firms and financial institutions to issue securities abroad, subject to mutual recognition principle Substantially allow resident firms and financial institutions to issue securities abroad Portfolio outflows Liberalize foreign portfolio investment by banks and institutional investors, subject to mutual recognition principle (i) Allow nonresident firms and financial institutions to issue securities in the domestic market, subject to mutual recognition principle; (ii) substantially liberalize foreign portfolio investment by banks and institutional investors Other flows Liberalize external borrowing within the context of ASEAN financial services liberalization Liberalize external lending within the context of ASEAN financial services liberalization, including through giving residents greater freedom to hold bank deposits with banks located in other ASEAN member states Other measures Allow some personal capital transactions to be conducted freely

29 Malaysia (66) Current account and FDI related (i) Eliminate repatriation requirements for export proceeds, as part of the overall liberalization process; (ii) fully liberalize FDI outflows by eliminating quantitative limits for those without own foreign currency funds Portfolio inflows Substantially eliminate the limit on the issuance abroad of debt and money market instruments by residents Portfolio outflows (i) Substantially liberalize foreign portfolio investment by institutional investors and collective investment vehicles by progressively raising prudential limits; (ii) liberalize purchases abroad of securities by residents, subject to mutual recognition principle; (iii) allow nonresidents to issue securities in the domestic market, subject to mutual recognition principle (i) Substantially liberalize purchases abroad of securities by residents; (ii) substantially allow nonresidents to issue securities in the domestic market Other flows (i) Substantially liberalize external borrowing, especially for nonfinancial entities; (ii) liberalize external ringgit lending within the context of ASEAN financial services liberalization; (iii) substantially allow residents without own foreign funds to open deposit accounts with banks located in other ASEAN member states Substantially liberalize external ringgit lending, including for activities outside Malaysia Other measures

30 Myanmar (2) Current account and FDI related Accept obligations under Article IV of the IMF Articles of Agreement (i) Eliminate payment formalities; (ii) substantially liberalize FDI outflows Portfolio inflows Establish a legal framework Continue to ease Portfolio outflows Establish a legal framework Continue to ease Other flows Ease in the context of ASEAN financial services liberalization, including through bank deposits Continue to ease Other measures Allow some personal transactions to take place

31 The Philippines (60) Current account and FDI related (i) Eliminate payment formalities for invisibles; (ii) eliminate repatriation requirements for FDI inflows; (iii) fully liberalize FDI outflows Portfolio inflows Portfolio outflows (i) Allow nonresidents to issue securities in the domestic market, (in the case of equities) subject to mutual recognition principle; (ii) allow residents to purchase foreign securities, including through collective investment vehicles, (in the case of equities) subject to mutual recognition principle (i) Substantially allow nonresidents to issue securities in the domestic market; (ii) substantially allow residents to purchase foreign securities, including through collective investment vehicles Other flows Liberalize external lending in the context of ASEAN financial services liberalization, including by progressively allowing residents to open deposit accounts with banks located in other ASEAN member states Substantially liberalize external lending Other measures (i) allow some personal transactions to be conducted freely; (ii) rationalize withholding tax for foreign investors, subject to mutual tax arrangement (i) Fully rationalize withholding tax for foreign investors; (ii) substantially allow offshore use of peso

32 Singapore (94) Current account and FDI related Portfolio inflows Portfolio outflows Take measures to promote capital outflows with ASEAN Other flows Eliminate the foreign exchange conversion requirement for external lending in Singapore dollar Other measures Promote offshore use of Singapore dollar in neighboring countries

33 Thailand (45) Current account and FDI related (i) Eliminate surrender/repatriation requirements for export proceeds; (ii) eliminate payment formalities for invisibles; (iii) eliminate surrender requirements for FDI inflows: (iv) substantially liberalize FDI outflows Portfolio inflows (i) Eliminate repatriation requirements for portfolio inflows; (ii) substantially allow residents to issue securities abroad; (iii) substantially allow nonresidents to purchase domestic debt and money market instruments Portfolio outflows (i) Substantially liberalize foreign portfolio investment by banks and institutional investors; (ii) allow nonresidents to issue securities in the domestic market, subject to mutual recognition principle; (iii) liberalize purchases of foreign securities by residents, including through collective investment vehicles, subject to mutual recognition principle (i) Substantially allow nonresidents to issue securities in the domestic market; (ii) substantially liberalize purchases by residents of foreign securities including through collective investment vehicles Other flows (i) Substantially liberalize external borrowing; (ii) liberalize external lending in the context of ASEAN financial services liberalization Substantially liberalize external lending Other measures Rationalize withholding tax on all securities for foreign investors, subject to mutual tax arrangement (i) Fully rationalize withholding tax on all securities for foreign investors; (ii) substantially allow offshore use of baht

34 Vietnam (33) Current account and FDI related Eliminate repatriation requirements for export proceeds Substantially liberalize FDI outflows (by 2016) Portfolio inflows (i) Eliminate repatriation requirements for portfolio inflows; (ii) substantially allow residents to issue securities abroad Portfolio outflows (i) Substantially ease restrictions on foreign portfolio investment by institutional investors; (ii) liberalize purchases by residents of foreign securities, including through collective investment vehicles, (in the case of equities) subject to mutual recognition principle; (iii) allow nonresidents to issue securities in the domestic market, (in the case of equities) subject to mutual recognition principle Continue to ease Other flows (i) Substantially liberalize external borrowing; (ii) liberalize external lending in the context of ASEAN financial services liberalization Continue to ease Other measures Allow some personal transactions to take place

35 Safeguard Measures

36 Three Types of Safeguard Measures 1. Sound and consistent macroeconomic policies 2. Administrative mechanisms 3. Capital controls

37 1. Sound and Consistent Macroeconomic Policies Sound policies characterized by price stability and fiscal discipline Choice between exchange rate stability and monetary independence, given the working of the impossible trinity under high capital mobility

38 2. Administrative Measures Restrictions on cross-border trading in forwards and derivatives, offshore currency use Mutual recognition Routine ex post reporting requirements Authorized domestic intermediaries Registration requirements Others

39 3. Capital Controls Need to build institutional capacity Regional cooperation to define an emergency during which such controls can be introduced Regional cooperation to remove stigma attached to such controls

40 Conclusion The diversity across the region calls for a gradual and judicious approach to sequencing the needed reforms The approach to CAL must be realistic, giving due respect for the level of economic and financial sector development of individual members Even so, the aim of the AEC to create an integrated financial market can substantially be achieved by 2015 and certainly by 2020 with determined efforts and political will