Market integration brings new hope

Market integration brings new hope

Workers load red onions onto a barge docked at Moei River on the Myanmar bank. Border trade. PATTARACHAI PREECHAPANICH
Workers load red onions onto a barge docked at Moei River on the Myanmar bank. Border trade. PATTARACHAI PREECHAPANICH

Asean's 10 members are eyeing the economic benefits of the long-awaited regional cooperation.

Labour movement a rather sticky subject

While the Asean Economic Community (AEC) contains no provisions for free movement of unskilled labour, one professor believes it will be a natural outcome of freer trade and investment along the borders.

However, skilled labour is unlikely to move more freely in the early stages of the AEC as some member countries, including Thailand, have imposed rules to prevent competition.

Countries have also implemented some measures to prevent a brain drain of professionals to other Asean countries.

Anusorn Thamajai of Rangsit University's economics faculty said the AEC would help to free up labour movements to enable Asean countries that are facing labour shortages to find more workers once the pact comes into force today.

"The regional labour market should become more balanced, helping to push these economies forward," he said.

Eight professions are allowed to move freely in Asean via the AEC: engineer, nurse, architect, surveyor, accountant, dentist, doctor and tourism operator. Those sectors account for less than 2% of Asean employment.

"We may see a slight movement of professionals, but high movement is unlikely because each country is allowed to set up regulations for professional certification," said Mr Anusorn.

Asean agreements call for mutual recognition arrangements (MRAs) that allow for regional labour mobility by enabling Asean citizens to gain the skills and experience needed for certification in their own country that can be transferred to other Asean countries. But differences in education, testing requirements and language make enforcement tricky.

For instance, Thailand created some regulations to prevent an influx of foreign engineers and architects, requiring them to work with qualified Thai engineers and architects.

Foreign nurses, dentists and doctors must pass examinations in Thai language provided by their respective professional associations, meaning these professionals must take the time to learn Thai before they try to work here.

Mr Anusorn said Asean countries needed to spend some time negotiating and amending the MRAs so that they would encourage labour mobility. The current rules set up by domestic professional associations constitute de facto protectionism.

Border trade a saving grace for economy

With the country’s export prospects still in critical condition, cross-border trade remains a lifeline for the government to revive its fragile economy apart from public spending on infrastructure and subsidies to raise domestic consumption.

As the global slowdown has dampened demand in Europe and the US, the Thai government has high hopes for trade links with Cambodia, Laos, Myanmar and Malaysia, whose combined population is 105 million. Economic growth for the first three countries is projected to expand by 7-8% each.

While Thailand’s overall shipments are forecast to contract by 5-5.5% in 2015 after falling 0.3% in 2013 and 0.4% in 2014, border trade with those four countries is flourishing.

A Commerce Ministry report showed border trade rose 10.9% in the first 11 months of 2015 to 998 billion baht, while overall shipment value for the period fell by 5.51% year-on-year to US$197 billion (7.09 trillion baht).

The value of border trade between Thailand and those four countries in 2014 was 988 billion baht, up 6.87% year-on-year. Border trade with Malaysia made up 508 billion baht, or 51.4% of the total, while Myanmar amounted to 214 billion, Laos 151 billion and Cambodia 115 billion. Thailand’s exports to the group amounted to 590 billion baht, up 5.26% from 2013.

Niyom Wairatpanij, a vice-chairman of the Thai Chamber of Commerce, said Thai border trade would grow by at least 7% in 2016. Robust growth is anticipated, particularly for trade with Myanmar, Cambodia and Laos.

Mr Niyom said border trade still had ample room to grow, depending on government facilitation of goods transport and the movement of people through border checkpoints.

The private sector is urging the government to open two more permanent border checkpoints at Huay Ton Nun in Mae Hong Son province and Three Pagodas Pass in Kanchanaburi. Thailand operates 38 permanent border checkpoints.

Border trade development was emphasised for the Commerce Ministry’s future trade strategy, featuring greater market access.

Trading link gets off to less than stellar start

As the Asean Economic Community kicks off today, the initial phase of the bloc's capital market integration through the Asean Trading Link has seen a less than stellar performance, beset by technical problems, especially with the clearing and settlement system.

The regional cross-border trading link to promote more than 3,600 Asean listed companies as one asset class commenced in 2012, but trade has been hindered by poor coordination of capital flow management, clearing and settlement among members, said Pattera Dilokrungthirapop, chairwoman of the Association of Securities Companies.

In 2011, seven bourses in six countries formed the Asean Trading Link. They are the stock exchanges of Singapore, Thailand, Malaysia, Indonesia, the Philippines, and Vietnam's Hanoi Stock Exchange and Ho Chi Minh Stock Exchange. However, only three — the Stock Exchange of Thailand (SET), Bursa Malaysia and the Singapore Exchange — have participated in trading on the link.

Ms Pattera said each bourse has its own clearing and settlement system, but they are not connected.

To overcome the problem, local securities companies have offered their own cross-border trading platform to clients instead of using the Asean Trading Link platform. However, investors would have to shoulder higher trading fees.

Ms Pattera said it was necessary to develop post-trade links as well as set up clearing and settlement, and custody links among the three bourses to make the Asean Trading Link more active, but this will be a time-consuming process. Lack of interest in Southeast Asian stocks is another reason for the Asean link's anaemic trade.

Despite the failure of the first stage, however, market executives have not thrown in the towel yet. Ms Pattera said the working team for this project planned to ask other Asean members such as Indonesia, Vietnam and the Philippines to collaborate on the Asean Trading Link.

A source from the SET said cross-trading between Hong Kong and Shanghai is successful because they use a single currency, the yuan, making clearing and settlement much easier.

BoT sealing currency deal with Malaysia

With the Asean Economic Community (AEC) starting today, the Bank of Thailand is on the verge of finalising guidelines with Bank Negara Malaysia on direct local currency settlements between the baht and ringgit.

Alisara Mahasandana, senior director of the international department, said the central bank was close to concluding the terms of reference with its Malaysian counterpart on currency settlements for trade and financial transactions.

Anti-speculation regulations and limitations on offshore transactions will be relaxed, while direct quotations between the baht and ringgit by agent banks will be allowed, she said.

"The next step is to use this framework in selecting a group of banks to engage in [direct local currency settlement], which is deemed as a pilot project, and the two central banks will have to approve banks located in both Thailand and Malaysia to perform this duty," said Mrs Alisara.

"[Direct local currency] transactions are expected to begin in next year’s first quarter after the selection process is completed.”

Chantavarn Sucharitakul, assistant governor overseeing financial market operations group, earlier said the Thai and Malaysian central banks would jointly select a group of commercial banks to initiate operations of direct local currency settlements.

The selection criteria are based on banks' preparation and potential to serve their customers across the two countries, such as high transaction volume in both currencies, having an extensive base of customers who are importers and exporters, and conducting a business network and financial operations in both Thailand and Malaysia.

"The Bank of Thailand is aiming at having commercial banks commence their operations for customers at the end of next year's first quarter," Mrs Chantavarn said.

Mrs Alisara said Thai state-owned banks would not be involved with the selection process as their transaction volume between the baht and ringgit is not extensive, but they could enter the next phase of selection depending on the central banks’ agreement.

In August, the two central banks signed a memorandum of understanding on settlement cooperation and investment, which was the first bilateral currency exchange pact in Asean.

Thailand's financial institutions will be allowed to determine foreign exchange rates between the baht and ringgit. The goal is to use local currencies for trade payments instead of the US dollar to avoid fluctuation when converting to the greenback.

The volatility of the ringgit against the dollar has been relatively high in recent years compared with that of the ringgit versus the baht.

The currency framework will benefit Malaysian trading partners who can choose to transact with their Thai counterparts either in the ringgit or baht instead of relying on major currencies, while Thai traders will benefit from using the baht for their trade settlements, Mrs Alisara said.

The average annualised volatility rate for the ringgit against the baht in 2015 is 8.8% compared with 5.1% for the baht versus the greenback and 10.7% for the ringgit against the dollar, reported Bank of Thailand data.

"In the future we expect the volatility rate of the ringgit against the baht to narrow once transactions in those currencies are more pronounced," she said.

Malaysia is Thailand's fourth-biggest trade partner globally after Japan, China and the US. Bilateral trade value between Thailand and Malaysia reached US$18.9 billion in the first 10 months of 2015 and totalled $25.5 billion for the whole of 2014.

The Bank of Thailand has discussed a similar currency framework with the Central Bank of Myanmar to be used to settle trade and transactions in Myanmar’s special economic zones, said Mrs Alisara.

Integration ready to spark shopping bonanza

Shopping demand is rising in border towns and major tourist destinations after the formation of the Asean Economic Community (AEC).

More new retail outlets, from convenience stores, supermarkets and speciality stores to department stores, hypermarkets and shopping malls, will be developed, particularly in northeastern provinces that link with Laos, Cambodia and Vietnam.

Retailers expect to attract spending power from tourists and people in neighbouring countries to offset the slowdown in domestic consumption.

The strong tourism recovery is a boon for the retail business. The number of foreign tourists visiting Thailand is expected to reach almost 30 million in 2015 and will continue to rise in 2016.

The AEC will benefit Thai tourism and more foreign tourists, especially from Asean, will visit Thailand.

Popular destinations for retail development are Tak, Buri Ram, Nakhon Ratchasima, Hua Hin, Surat Thani and Phuket.

Siam Retail Development Co, the retail development arm of Land and Houses Plc, will open Terminal 21 Korat in Nakhon Ratchasima in 2016.

SET-listed Central Pattana Plc, the property arm of Central Group, will open shopping complexes in Nakhon Ratchasima and Nakhon Si Thammarat.

The Mall Group will open its Blu Port shopping complex in Hua Hin in 2016 and its Blu Pearl project in Phuket in 2017.

"We have no plan to open shopping projects in neighbouring countries even though we have been contacted by businessmen in several countries to develop some projects," said Supaluck Umpujh, vice-chairman of The Mall Group.

The group expects huge opportunities in Thailand because the number of foreign tourists will sharply increase over the next few years.

TCC Group, owned by billionaire Charoen Sirivadhanabhakdi, has plans to develop retail projects in tourist destinations such as Pattaya and Hua Hin and some in the Northeast to cash in on the AEC.

MBK Plc is also planning a project in Mae Sot district of Tak to serve demand from Myanmar customers.

Rangsit Plaza Co, the operator of Future Park Rangsit, is also looking for market opportunities in the Northeast, focusing on provinces that can link to nearby countries.

"Thailand is expected to become the hub of Asean, so there is strong demand from international and Thai brands to open shops at retail complexes in the country," a marketing analyst said.

More than 1,000 brands in various product categories, especially fashion and food, have entered Thailand in recent years.

CP Fresh Mart, 7-Eleven convenience store and Makro cash-and-carry store under the umbrella of Charoen Pokphand Group are also eyeing the Asean market.

Central Group went to explore opportunities in fast-growing Vietnam, where retail business is expected to expand 9.5% this year.

Thai-based companies poised to up sticks

The Asean Economic Community (AEC) is about to open a huge gateway for manufacturing industries on the move.

Analysts expect Thai-based manufacturers to shift operations to neighbouring countries to take advantage of cheaper labour.

They also envision foreign manufacturers from outside the Asean region moving into Thailand to boost profits and use the country as a hub for further expansion and to transport products throughout the region.

Some labour-intensive industries such as garment-making are expected to flee Thailand in search of lower labour costs in Cambodia, Laos, Myanmar and Vietnam.

"Other food-processing industries as well as consumer goods industries are also expected to move to these four countries in order to capitalise on zero tariffs granted by the EU in those markets," said a Kasikorn Research Center (KResearch) analyst.

The EU's Generalised System of Preferences (GSP) rewards less-developed nations with zero tariff privileges, which expired for Thailand in 2014.

"We have seen this trend for a few years," said the analyst, who asked not to be named. "But the opening up of the AEC will accelerate the trend and we expect more Thai food makers to move to neighbouring countries."

Some industries that require skilled labour, high technology and complex design will stay in Thailand, the analyst said. One industry expected to remain here is upstream textiles, owing to the sector's colouring and staining techniques and intricate design.

Some high-tech industries outside Asean are likely to move to Thailand to make use of the location as a distribution hub linked to all Asean members, the analyst said.

KResearch expects foreign investors from Japan, South Korea, China and even Europe to invest in Thailand and provide products and services throughout Asean.

This would be in line with the Thai government's policy to promote and attract foreign investment in clusters by offering investment privileges to high-tech industries. But the trend is likely to take time to materialise as foreign investors are also being lured by privileges from other Asean members.

"Other Asean governments also want foreign investment, and have set up special economic zones for foreign investors," the analyst said. "Companies will sit back and think about which countries offer the best privileges before starting investment."

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