Zeti Akhtar Aziz: Connecting ASEAN SMEs through financial integration
Speech by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia (Bank Negara
Malaysia), at the ASEAN SME Conference 2015 "Connecting ASEAN SMEs through
Financial Integration", Kuala Lumpur, 27 May 2015.
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It is my pleasure to be here this afternoon to speak at this inaugural ASEAN SME
Conference. This conference takes place at a challenging and yet exciting time for the
ASEAN region. While there continues to be uncertainty on the future prospects for the global
economy, the ASEAN economies have demonstrated a high degree of resilience. The
ASEAN economies have benefitted from the efforts for more than a decade to strengthen the
foundations of our economies and financial systems. Our potential is now being further
enhanced by steps to intensify regional economic and financial integration. In particular,
ASEAN has taken the opportunity during our period of growth and stability within this decade
to remain steadfast in advancing our efforts to forge greater economic and financial
integration to unlock the immense opportunities for the region including for the SME business
community.
My remarks today will touch on three areas; the significant intrinsic potential of the ASEAN
economic bloc, how the SME sector would stand to benefit from these prospects, and on
how greater financial integration can serve as a catalyst for the growth and development of
SMEs.
ASEAN: A growth centre in the global economy
ASEAN has emerged centre stage in the global economy and has been recognised as one of
the most dynamic regions in the world. The region has sustained high economic growth with
a long-term average GDP growth of 5.3%, higher than the global growth average of 3.6%.
Currently, as a single entity, ASEAN is the 6th largest economy in the world with a GDP
close to USD2.5 trillion. With a projected annual GDP growth of 5.4%1 over the next six
years, the region is poised to reach an economic size of USD3.7 trillion by 2020, four times
the size it was a decade ago. The strong growth and dynamism of the region is supported by
its favourable demographic structure. With a population of more than 630 million people and
a burgeoning middle class, ASEAN is rapidly transforming into a thriving hub for consumer
demand. By 2020, ASEAN is expected to account for more than USD2 trillion of additional
consumption. This is being reinforced by rising incomes in the region, with per capita income
almost trebling in this recent decade.
The rapid progress of economic integration in ASEAN has enabled the region to harness the
benefits arising from the diversity and complementarities that exist across the ASEAN
economies. Amid the strengthening of cross-border supply chains in the region, intra-ASEAN
trade and investment activity have increased significantly over these recent 15 years.
Intraregional trade now accounts for almost a quarter of the region's total trade while
intraregional investment activity has quadrupled to 17% of total investment since 2000.
The vibrant SME sectors in the respective ASEAN economies have been an important part of
this commendable economic progress. Indeed, going forward, the development and growth
of ASEAN SMEs will have significant potential to contribute to the region's prospects and
become a key source for the future growth of the region. It is estimated that SMEs would
account for between 20 to 50% of GDP across the ASEAN economies, constituting more
than 96% of enterprises in the region, and contributing 50 to 80% of total employment.
While SMEs continue to contribute significantly to domestic economic growth, intra-regional
trade in ASEAN remains driven by large multi-national companies with the SME sector
mainly having a supporting role in the regional production network. The next phase of the
ASEAN economic integration process should therefore be focused on enhancing the role of
SMEs in contributing towards greater cross-border economic activity. To realise this, policy
initiatives are being geared to ensure that SMEs in our region will be plugged into the
regional and global value chains.
Leveraging on ASEAN's growth prospects
The recent drive for the greater economic and financial integration of ASEAN has paved the
way for SMEs to expand and thrive. Firstly, ASEAN has enabled SMEs in the region to gain
access to a larger and more extensive marketplace. The realisation of ASEAN into an
integrated economic community means that the potential benefits for SMEs in the region are
no longer constrained by national borders. With easier cross-border flow of goods, services,
capital and people, ASEAN offers significant market opportunities for SMEs. Given the large
consumer base in ASEAN, SMEs can also utilise ASEAN as a platform to strengthen
competitiveness before entering into the global market.
Secondly, the lowering of regulatory barriers to trade within ASEAN has further increased
the potential for SMEs. The standardisation of trade procedures, the removal of tariff and
non-tariff barriers and the improvement of regulatory frameworks across the region has been
an additional enabling factor. This will not only provide SMEs with a level playing field in
conducting businesses across the region, but will also maximise the competitive advantage
of the individual ASEAN economies. This is evidenced by the emergence of regional supply
chains, where reductions in tariffs on imported raw materials have resulted in lower
production costs, while the removal of tariffs on a wide range of finished products for export
within ASEAN will also benefit SMEs that trade within the region. Thus, the lowering of tariffs
within the region and the large regional market will provide an environment for SMEs to grow
and achieve the production scale and efficiency required to compete in the global
marketplace. Additionally, an integrated ASEAN market will also serve to facilitate the
meeting of global standards as SMEs upgrade to meet the more harmonised compliance
requirements across the region.
Thirdly, SMEs will also benefit from the drive to strengthen connectivity in the ASEAN
region. As highlighted in the Master Plan on ASEAN Connectivity, a comprehensive roadmap
of strategies has been outlined to address connectivity challenges on three key areas,
namely physical infrastructure, institutions and the people in ASEAN. Increased connectivity
across all three dimensions will provide the physical and soft elements needed to create the
enabling business environment for SMEs.
Fourthly, various SME-specific policies by the ASEAN member countries will also benefit
SMEs in the region. This includes the establishment of a regional SME internship programme
which has assisted SMEs in seven ASEAN countries to enhance the skills of their employees
through structured staff exchanges and capacity building workshops. A further initiative is the
recent launch of the online ASEAN Marketplace which aims to provide SMEs with
information on the business environment in each respective ASEAN country and a business
directory of SMEs to facilitate the access to the markets in the region as well as the potential
for collaboration of SMEs across the region. To date, more than 1,000 SMEs across the
region have registered with this online portal. It is expected to attract more than
20,000 businesses during the course of this year. Moving forward, the ASEAN Strategic
Action Plan for SME Development 2016-2025 will also focus on promoting productivity,
technology and innovation, access to financing, enhancing market access and
internationalisation, while also enhancing the policy and regulatory environment, and
promoting entrepreneurship and human capital development.
Fifth and finally, SMEs in the region will also benefit from ASEAN's strategic economic
linkages with the greater Asia and with other parts of the world, including the advanced
economies and other emerging regions. Several countries have entered into bilateral
agreements, including trade agreements with ASEAN to enhance economic cooperation.
These multilateral and bilateral engagements have the potential to create many new
business opportunities for ASEAN SMEs.
Greater financial integration as a catalyst of growth for SMEs
Let me now turn to the prospects for greater regional financial integration and its potential to
support growth for the ASEAN SMEs. Given the region's high savings rate of approximately
30% of GDP, there is immense scope for greater financial integration in the region. An
intensification of financial integration in ASEAN will serve to enhance the more effective
intermediation of funds and thus the efficient allocation of resources in the region, thereby
acting as a catalyst to achieve a growth that is mutually reinforcing for the economies in the
region. This will allow for excess savings in one country to be channelled into productive
investments in another country within the region.
The bulk of ASEAN's surplus funds, however, are currently intermediated mainly through the
international financial markets before being reinvested back into the region. In particular,
more than 90% of cross-border portfolio investment flows are channelled to the advanced
economies. Given the USD 1 trillion infrastructure funding required by ASEAN in the next
decade2, greater financial integration will facilitate the re-channelling of at least a part of the
region's surplus funds towards productive investment opportunities in the region. Regional
financial integration will also allow for more efficient risk diversification of assets to include
foreign assets from within the region. This will not only reduce vulnerability to external
developments but will contribute to achieving more stable conditions in the regional financial
markets.
Following the development of the domestic financial systems in ASEAN, the next phase of
development is to foster greater financial integration in the banking, insurance and capital
markets and in the linking of the payment and settlement systems. The growing presence of
regional financial institutions will be an important contributor to the development of SMEs in
ASEAN. The availability of cross-border financing will enable SMEs to innovate, invest and
further expand within the region. Beyond financing, SMEs can also leverage on the extensive
networks and advisory services of regional banks to facilitate matching with regional clients
and entry into new markets. This can be an important source of information on
countryspecific dynamics and requirements for the SMEs before venturing into new markets in the
region.
The digital age also augurs well for SME businesses. The use of technology such as mobile
and internet banking have enabled financial institutions to provide quality and affordable
financial services to a regional SME client base. It is paramount for SMEs to embrace these
technological enhancements. This includes the adoption of end-to-end supply chain
management solutions that integrate the production and financial flows of SME activities,
allowing for greater expansion into regional production networks.
Together with digitalisation, the financial integration process will catalyse the convergence of
institutional frameworks across ASEAN countries to create a more effective regional
financing ecosystem. Such institutional infrastructures and instruments include credit
guarantee schemes and credit and collateral registries. Another example is the ASEAN SME
Working Group's methodology for the ASEAN Benchmark for SME Credit Rating to facilitate
the establishment of credit bureaus in ASEAN member states. Through these credit bureaus,
financial institutions would have wider access to reliable credit records of SMEs, thereby
increasing the access to financing for the SMEs.
The promotion of deeper financial inclusion can be regarded as the final mile in enhancing
and enriching the regional financial integration process. The ASEAN Finance Ministers' and
Central Bank Governors' Meeting in March this year elevated financial inclusion as a regional
policy priority. Indeed, ASEAN will continue to coordinate and intensify efforts to advance
financial inclusion, including addressing cross-border financing issues for SME trade
financing and investments. This is critical to ensure the benefits of regional integration are
experienced by all in the region.
Conclusion
While the future for ASEAN looks promising, ASEAN businesses, including SMEs, need to
consider and explore an ASEAN strategy and to view ASEAN as an increasingly integrated
market. Having such regional or international perspectives may prove to be a game changer
for SMEs, paving a path towards sustained growth, increased job creation, and higher
innovation capacity.
A crucial element in the ASEAN economic agenda is the development of the SME sector
which will contribute to stronger and more equitable growth in the region. The next frontier for
SMEs is to emerge as regional players that are not constrained by the domestic consumer
base. SMEs possess the potential to participate in global production networks by riding on
ASEAN's intrinsic strengths and prospects, multiple SME-focused policy initiatives as well as
the continued wave of regional financial integration. This will allow for the transition for SMEs
to benefit immensely from the ongoing regional economic and financial integration and thus
contribute towards a balanced and sustainable growth of our region.