With less than a year to go before the official deadline for forming the Asean Economic Community, a huge amount of work still needs to be done. One of the cornerstones of regional integration is supposed to be liberalisation of trade in services, offering Asean investors up to 70% equity participation in service businesses. However, it has also proved to be one of the biggest challenges, and negotiations are as much as two years behind schedule.
If member states still intend to comply with the original end-2015 deadline, each one will have to speed up the liberalisation of its service sector within the framework of a very limited number of negotiations. This will prove very difficult because of the vastly different levels of development of the service sectors of member states.
The overall AEC Blueprint acknowledges the disparity in levels of development by giving member states some flexibility when it comes to opening their economies. Members have made great use of this flexibility when negotiating service-trade liberalisation to shield their service sectors from potential impacts. However, this also means that there will be less urgency for local service businesses to make adjustments and improve their competitiveness in preparation for liberalisation.
The hotel sector is earmarked as one of the "priority integration sectors" under the AEC. Thailand has increased the hotel sector equity ownership limit to 70% for Asean investors — but for superior deluxe (six-star) properties only — in the eighth package of specific commitments under the Asean Framework Agreement in Services (AFAS). The limit in the previous seven packages was 49%.
The practical impact of such an equity limit increase should be contained since any six-star hotel investment will require investments of more than 500 million baht. Furthermore, companies investing in such properties can apply for incentives from the Board of Investment, which allows foreign investments of this type to be 100% controlled by foreigners. BoI approval of such hotel investments should not be difficult since the large investment size usually requires foreign capital and foreign investors.
Restrictions on foreign investment in the AFAS negotiation packages are not unusual. Most Asean countries, with the exception of Singapore and Vietnam, have sought similar curbs.
Indonesia, for example, allows 100% Asean equity control of hotels but only in certain locations, Malaysia allows 70% Asean equity in four- and five-star hotels only, and the Philippines stipulates that Asean investors can only hold a minority share in the hotel business (see chart).
Although liberalised trade in goods and services is at the heart of AEC integration, what businesses want most is improvements to trade facilitation, and in this area a lot more must be done. For example, the much-hyped Asean Single Window requires network infrastructure that enables international traders to submit required documents such as import/export permits and certificates of origin issued by member states' international trade authorities at a single location or entity.
Currently, Thailand's National Single Window system links 17 government agencies together, an increase from 12 in 2013. However, to be fully functional, the system must link 37 agencies from both the public and private sectors. That will be a very tall order to fill in the next 12 months,
Ultimately, the biggest obstacle to the launch of the AEC by the end of 2015 is not speeding up negotiations, but each member state's real readiness for integration. Therefore, Dec 31 will probably be just another beginning for the AEC, not a hard deadline.
Nonetheless, businesses should not wait for the "completion" of AEC because they will miss out on opportunities. Instead, they should let market conditions be the deciding factor and take advantage of the existing tools and channels to gain access to the market and investment opportunities.
Demand from consumers, not the regulatory environment, is the factor businesses should be considering first. For example, the number of tourists travelling to Indonesia grew by an average of 7% a year from 2002 to 2013, and its growth potential is still increasing, as evidenced by 9% growth in 2014. This implies that demand for hotels will also increase, especially in Jakarta. Therefore, hotel investments in Jakarta would seem to have greater potential than in other cities.
Although Indonesia will relax regulations restricting foreign investments in hotels in locations outside its capital city, Asean hotel investors interested in Jakarta still have other options such as forming a joint venture with Indonesian nationals.
EIC, a unit of Siam Commercial Bank Public Company Limited, offers in-depth macroeconomic outlook and sectoral impact analyses. For more information, visit www.scbeic.com or contact eic@scb.co.th