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Pulling Asean’s banking system closer contains contagion risk
Those supporting closer Asean banking integration should be careful what they wish for
Jonathan Rogers 22 Sep 2017

A principal aim of the Asian Banking Integration Framework (ABIF) is to create a prosperous, low interest rate environment in which poorer countries can be elevated closer to their richer Asean peers, including Singapore, Indonesia and Thailand.

That’s a noble ambition, but I wonder whether the political risk and its attendant contagion risk dooms the project before it’s even caught sight of the finish line.

The recent crackdown on a leading political opponent in Cambodia by long-term incumbent prime minister Hun Sen appears to raise the political risk stakes in that country, as does the ethnic conflict on its borders with a Muslim minority in Myanmar. The only reasonably precise parallel to that political risk in a multilateral context – and its attendant ethical dimension – would be Turkey’s ambitions to join the European Union.

Turkey’s newly discovered penchant for torture might stymie that bid, and although Asean contains many situations which are similarly jarring from an ethical point of view – one thinks of the jailing of opposition leader Anwar Ibrahim in Malaysia on trumped-up charges – creating an AEC which is more than a ragbag coalition seems to be rooted in removing them.

That is why ABIF is to be taken seriously as an executable ambition rather than just a condescending platitude. ABIF seeks to allow qualified banks to act in neighbouring Asean countries with the same degree of freedom and latitude as domestic banks in that country.

The hope is that as integration kicks in, the project will yield huge dividends in terms of trade with countries outside of Asean, as well as freeing up a pool of investment capital within the region at a lower cost of term funding than is possible under the current terms of banking within Asean.

This is a sound enough mission statement. However, to return to the CLMV countries, there is the fear that the risk of assuming politically risky countries into the AEC carries with it the spectre of contamination within the banking and financial markets.

In other words, while a potential political crisis in a Cambodia or a Myanmar presents as being of limited risk to the richer member countries of Asean under the current relationships in that grouping, if ABIF goes ahead as planned by 2020, they will have reason to be concerned.

So it might well be a case of be careful what you wish for. Of course, there’s a more optimistic reading of this which is that should ABIF deliver the economic benefits it touts on the label, it will help enhance political stability in the CLMV countries and in the process, raise all boats.

I’m less inclined to take this second view, mainly because the differences between the richest countries in Asean and the poorest are so vast that pulling off the AEC in a way which is meaningful and structurally significant, rather than just significant in aspirational terms, is herculean.

However, assuming the political will exists to pull off ABIF, contagion would be the biggest fear as the region’s banking systems are pulled into alignment.

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