Jumaat, 11 Oktober 2013

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The Star Online: Business

On track to Asean integration?


THERE can be no doubt that Asean member states want the Asean Community, a platform for regional integration based on the three pillars of the economy, security and culture, to succeed.

Of the three pillars, the most important by far is the Asean Economic Community (AEC) whose main objectives include a single market and production base, a highly competitive economic region, a region of equitable economic development, and a regional economy fully integrated into the global economy.

Therefore, Myanmar and Malaysia, who will be chairing the Asean summits next year and in 2015 respectively, will be closely watched as they set the agenda towards regional integration.

At the 22nd Asean summit held in April and chaired by Brunei, integration was the major agenda item. The 23rd summit, also chaired by Brunei and held over Wednesday and Thursday, committed the members to the Asean Community goals as well as regional stability and prosperity.

However, the end-2015 deadline, while a milestone in regional integration, only marks the beginnings of integration, not the deadline for total integration, as government officials and Aseancrats point out.

While Asean government leaders sing paeans to regional integration, their underlings are more practical as the AEC is very much a work-in-progress.

The AEC have a scorecard measuring members' progress but US Chamber of Commerce senior director for South East Asia John Goyer says a better way of measuring compliance is needed.

"The scorecard does not access how well or effectively obligations are being implemented, it just assesses whether rules/regulations are in place," he says in an email reply to StarBizWeek.

Goyer says while the impact of the AEC have been generally positive, there is substantial unrealised potential, adding that Asean has had a substantial focus on trade and investment, which has served the organisation, its members and its people, very well.

"Economic integration, both within Asean and between Asean and its major trading partners, has played an important role in the region's growth and development," he points out.

But business leaders have cause to question whether economic integration is deepening. In fact, a joint survey by the American Chamber of Commerce in Singapore and the US Chamber recently showed that 52% of 475 senior US business executives doubt the AEC's goals will be realised in 2015.

Some 60% of them believe that member states will not be able to fully achieve the goals set out for deeper economic integration until 2020 or later.

The survey also showed that these executives remain optimistic of overall business prospects in the region and expect the levels of trade and investment in Asean by US firms to rise over the next five years.

The push for economic integration

Nevertheless, despite the pessimists' views, Asean ministerial officials remain committed to ensuring that member states' governments comply with the AEC goals.

Malaysia's International Trade and Industry Ministry secretary-general Datuk Dr Rebecca Fatima Sta Maria says the challenging part comes from improving behind-the-border measures. These are measures akin to non-tariff barriers and include technical barriers, labelling requirements and other regulatory measures.

She notes that while member states are working on increasing intra-Asean trade, the region is still more competing than complementary.

"Trade facilitation must be a priority. We have begun the process of collating the non-tariff barriers (NTBs) as brought to our attention by the business community," Rebecca says, adding that Asean needs to strengthen its dispute settlement mechanism.

She also stresses that 2015 is not a deadline. "It is a major milestone towards economic integration. The process of economic integration will continue," Rebecca says.

Rebecca says there is an agreement among all parties that there is a need to streamline meetings while the oversight process as provided by the senior economic officials, Asean economic ministers and the Asean Economic Community Council should be stepped up.

Meanwhile, former deputy secretary-general for Asean economic cooperation Dr Suthad Setboonsarng acknowledges that members' commitment to implement and enforce AEC rules is still an unresolved issue.

"This is why the focus is now on administrative measures and product/service standards. Changing administrative procedures requires changing existing regulations, rules and laws which may be embedded in other laws and regulations. It is a demanding exercise and takes time," he points out.

Suthad says the 2015 deadline "is a good milestone" but some areas of the AEC will have progressed more than others.

"For example, the textile industry, automotive, and wood-based products such as furniture are almost single markets. However, service sector liberalisation will need us to properly address winners and losers.

Sensitive issues

These are sensitive issues that need to be further investigated," he adds.

Suthad likens the AEC rules, regulations and laws governing business conduct in the region as the Asean software infrastructure but the process of implementing them will take years and not all will be completed by the end-2015 deadline.

"This doesn't mean we will stop working on them," he says. Inevitably, the private sector must step up to assume part of the burden that the AEC changes will demand and which the public sector may not be able to cope.

Suthad says one example in which the private sector can take an active role is in product standards testing and verification where governments can accredit private companies/institutions to provide the certification while maintaining the supervision role.

Inevitably, economic integration will be important for Asean's community-building process as a natural next-step to the political security and the peace dividend cultivated over the years.

"Asean can only determine its own future if the region is integrated.

"We all in Asean know that autarky is not sustainable in the medium or long run. These practices cater to pressure in domestic politics and only serve short term interest. Governments and, more critically, their voters will know that this is not in the best interest of the country and region," Suthad says.

Real Fed’s test for Yellen


Sometimes it takes a woman to do a man's job

IN Chinese history, a woman's ascension to power is either a sign of profound change or dramatic crisis. Janet Yellen's nomination to assume chairmanship of the US Fed is a sign of changing times.

Note that both the Fed and the SEC will be headed by women. After all, Christine Lagarde, head of the IMF, has said that if Lehman Brothers had been a bit more Lehman Sisters, we would not have had the same degree of tragedy!

In essence, we need women to clean up man-made messes.

The difference here is not that Yellen is taking over in crisis, but is faced with withdrawing the medicine for the crisis. She inherits an intoxicated punch bowl, with a central bank that needs to unwind massive quantitative easing (QE), at the same time as the United States faces its own debt debacle. According to the Congressional Budget Office, the United States will run out of borrowing authority on Oct 17 and will have about US$30bil in cash after that. The country would be unable to pay all of its bills, including benefits, salaries and interest, sometime between Oct 22 and Oct 31.

The rest of the world sits aghast with disbelief that the most powerful economy in the world can have a debate whether the government would stop paying its bills, because some Tea Party members can play "who blinks first" with the President on changing the Medicare legislation. This is stark reminder that crisis is not about rationality and that politics is the real dismal science, not economics.

I have no doubt that in terms of IQ, EQ and experience, Janet Yellen is imminently qualified to be the captain of the world's leading central bank. As former president of the San Francisco Fed, she understands not only the issues of an open, innovative West Coast economy, but also the dynamic Pacific Rim countries that account for 55% of world GDP (gross domestic product) and 44% of world trade.

The Apec economies, being large users of the dollar for trade and largest dollar holders in their foreign exchange reserves, have high hopes that the new Fed chairman will protect the value of their dollar holdings.

What is the scorecard that Yellen has inherited?

QE3 is committed to buying US$85bil worth of long-term Treasury paper, including US$40bil of mortgage-backed paper, per month, as long as is necessary. Furthermore, since December 2012, the Fed has said it intends to hold the federal funds rate near zero at least until unemployment has declined below 6.5%. As far as I know, there is no theoretically proven causal effect on low interest rates reversing the level of unemployment. Even current chairman Ben Bernanke has admitted: "We don't have tools that are strong enough to solve the unemployment problem."

Despite this, the purpose of QE is to tell Congress that the Fed stands fully behind the economy, buying time for the real structural reforms to be undertaken by the politicians.

But that is exactly the unfortunate dilemma of modern central banking. By stepping forward with a printing solution in a policy vacuum, central banks gave their politicians the perfect excuse not to take the tough medicine of structural reforms. As former European Commissioner Jean-Claude Juncker honestly admitted: "We heads of government all know what to do, we just don't know how to get re-elected when we do it."

We all recognise that unconventional times needed unconventional tools. The Fed can be congratulated for taking decisive action in 2008 to prevent a financial meltdown. But applying a stimulant during a heart attack does not mean that you should apply it forever.

There are several good reasons why aggressive and prolonged easing can lead to negative results. First, by spraying everyone with liquidity, it is the banks and those able to borrow cheaply that benefit more than those who cannot access finance. This is a distributional issue which has huge political ramifications that will haunt future central bank independence.

Second, the low interest rates actually erode the income of pension funds and life insurance companies, thus worsening the net wealth of the retirees. Another distributional issue that explains why Republicans also do not like QE.

Third, prolonged low interest rates and high liquidity renewed incentives for a "search for yield" and another round of speculation and leveraging. Large carry trade capital flows rushed into emerging markets, and there was a huge gush out in May when Ben Bernanke started hinting about tapering QE. The latest IMF Global Financial Stability Report has warned: "After a prolonged period of strong portfolio inflows, emerging markets are facing a transition to more volatile external conditions and higher risk premiums. Some need to address financial and macroeconomic vulnerabilities and bolster resilience."

Fourth, QE and low interest rates are atrophying market discipline. Central bank balance sheets are triple what they were before 2007. They have become front line intermediaries in areas such as the mortgage market and money markets.

Indeed, governments with debt over 100% of GDP are completely reliant on low interest rates to sustain their budget debt servicing at a reasonable level.

Even the august Bank for International Settlements has warned, "unusually accommodative and protracted monetary conditions can delay the necessary balance sheet repair and misallocate resources".

The financial markets and the governments are very happy that Yellen said in April that she was persuaded that "the policy rate should, under present conditions, be held "lower for longer" than conventional policy rules imply," implying that she is a monetary dove.

But what may be needed in the near future is tough action to ensure that the United States and the rest of the world do not enter into a period of stagflation – slow growth, high unemployment and inflation.

Now that's a real test of central banking skills. Good luck, Janet. We all wish you well.

Andrew Sheng is president of the Fung Global Institute.

Unit trust's CG challenge


THE Malaysian unit trust industry quietly recorded a milestone at the start of the year when the total net asset value (NAV) of its funds climbed above the RM300bil mark in January. That figure matters because it shows just how fast the industry has been growing in recent years.

When 1996 came to a close, the total NAV was RM60bil. It went past RM100bil in January 2006, about nine years later. However, it took only four years to double. That was in March 2010.

The subsequent step up was achieved in an even shorter time. The vault from RM200bil to RM300bil, which basically meant that the industry's worth increased by 50%, was made in less than three years.

According to the Securities Commission, the unit trust NAV is projected to increase to almost RM830bil in 2020. That's merely seven years away.

The rise in the other indicators are not as huge, but the numbers for the last decade (see table) tells the same story – that the pace of the country's unit trust business has picked up tremendously.

It appears that the man in the street in Malaysia is finally embracing the idea of investing in unit trust funds.

The history of unit trust industry here goes back to 1959, but public awareness of unit trust investing had been close to zero until 1981, when Amanah Saham Nasional was launched. However, demand for unit trust funds offered by the private sector had been slow to take off until the new millennium.

In the Capital Market Masterplan 2, the SC notes that the rapid growth of the investment management industry (21.2% annually between 2000 and 2010) was largely driven by the unit trust players.

"Based on historical trends, the growth of the investment management industry is likely to outpace the growth of equity assets over this decade. This is a feature typical of an economy in transition from middle income to developed status," says the commission.

"Projections indicate that the penetration rate for unit trusts is likely to almost double from 18% in 2010 to 34% in 2020, which is closer to levels usually seen in developed markets."

(The penetration rate is the unit trust NAV as a percentage of the stock market capitalisation.)

In short, the unit trust companies are becoming more influential in the capital market. But here's the thing: When was the last time you've heard a unit trust company publicly talking about corporate governance and shareholder activism?

Visit the websites of these companies and you'll see that most of them focus solely on the companies' products, investment prowess and accolades.

As a whole, the industry too has little to say about the governance of the companies its players invest in, and about the role of institutional investors in shareholder activism.

The Federation of Investment Managers Malaysia (FIMM) says its mission is to build "the highest level of trust, integrity, standards and ethics for investor security, growth and knowledge in the investment management industry". Naturally, the federation looks within, coming up with rules and measures to improve the environment for unit trusts and to better protect investors.

The federation does have an advocacy role – to promote public awareness of the benefits and risks of investing in unit trusts. Its code of ethic and rules of professional conduct for unit trust funds have no room for any reference to engagement between FIMM members and the companies they invest in.

Yet, the unit trust companies can do more than take good care of their customers and investment portfolios.

The SC's Corporate Governance Blueprint 2011 has a chapter on the role of institutional investors, urging them to take a leadership role in governance by exercising responsible ownership.

Says the SC: "Institutional investors are in a unique position to exercise influence over companies and to hold them accountable for good governance.

"Given the typically significant stake they hold, they have the ability to demand meetings with the senior management of companies, challenge them on issues of concern, discuss strategies for achieving the companies' goals and objectives and be the leading voice of shareholders in demanding corrective action when wrongdoing occurs."

To prod institutional investors to do more for corporate governance in Malaysia, the Blueprint recommends the formulation of a new code and the creation of an industry-driven umbrella body, both for institutional investors. To date, neither has happened.

The flourishing of the unit trust industry may reflect Malaysia's progress toward high-income status, but that doesn't change the fact our unit trust companies have some way to go before their take on corporate governance matches that of their top counterparts in the developed countries.

Many of the biggest mutual fund managers in the United States, for example, have guidelines on how they vote in shareholder meetings of the companies they invest in.

Says American Funds on its website: "A proxy authorises someone other than the owner of a stock to cast a vote on his or her behalf at the issuing company's shareholder meeting. Proxies typically are used by shareholders to elect a company's board of directors, select independent auditors, approve executive compensation, and vote on other management- or shareholder-sponsored proposals.

"With responsibility for millions of shares of stocks, American Funds routinely votes by proxy. Through this process, we aim to promote the long-term financial interests of our shareholders."

The mutual funds are also open about their views on corporate governance, and often, they clash with the management of listed companies over proposals.

"Vanguard's duty to fund shareholders is to maximise the long-term value of the investments held by our funds. We advocate effective corporate governance by the companies in which our funds invest because we believe that it is an important way to enhance shareholder value," says The Vanguard Group, another mutual fund giant.

Fidelity Investments, home of perhaps the most famous mutual fund, the Fidelity Magellan Fund, has this to say about its role in corporate governance: "Even within sound, time-tested markets, there still exists the potential for corporate missteps such as accounting and financial reporting irregularities and corporate bankruptcies.

"The occurrence of such events underscores the importance of sustaining investor confidence in the basic integrity of corporations and their leaders, as well as the fundamental fairness of securities markets. We know that shareholders rightfully look to Fidelity to be responsive to matters relating to corporate governance."

The unit trust companies here will perhaps argue that their customers don't expect them to carry the torch in the struggle for better corporate governance, that the unitholders prefer that time and resources are spent on managing investments instead of shareholder activism.

That may be the case now, but when investors become more enlightened, they will eventually realise that poor corporate governance gets in the way of solid long-term returns.

Executive editor Errol Oh, who has invested in unit trusts, wonders if the ownership of most of the Malaysian unit trust companies contributes to the lack of shareholder activism.

Kredit: www.thestar.com.my

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