Regional connectivity is a central part of domestic economic development and can take on many forms such as physical infrastructure, trade and investment, financial interconnectedness and one-on-one interactions. Financial connectivity underpins and supports all forms of connectivity. Promoting a well-connected financial system is key to strengthening regional economic integration on a sustained basis.
How do we strengthen financial connectivity within our CLMVT (Cambodia, Lao PDR, Myanmar, Vietnam and Thailand) region? The answer to such an important question lies closer to us than we might expect.
Over the past few years, any frequent traveller would easily notice a marked increase in the number of flights within the region, particularly those operated by low-cost airlines. The airline industry serves as a model to develop regional financial interconnectedness.
In retrospect, the success of low-cost airlines can be mainly attributed to two factors: the right business model for the regional market and the enabling infrastructure and ecosystem. Low-cost airlines understand the region's untapped market. They serve large, unmet demand with the right business model through simple products, much more competitive prices and a number of cost-minimising strategies. At the same time, policymakers contributed to the creation of the regional airline network. Policymakers should at least take five factors from the growth of low-cost airlines as lessons to help develop other service industries that have the potential to serve the region.
First is the introduction of the "Open Sky Policy" which has opened up opportunities for new potential players, at a scale large enough to create a strong viable network of airlines providing regular service with competitive prices.
Second, substantial investment in necessary infrastructure, such as airport facilities, landing slots and aeronautical radio networks.
Third, rules and regulations, especially on cross-border supply of services, were harmonised to support the airlines. Visa requirements and customs procedures were also streamlined to accommodate travellers.
Fourth, authorities lifted standards for airline staff, driving the airlines to actively promote their human resource development to be on par with international standards.
Lastly, the airlines have been encouraged to leverage on investments in specialised facilities in other countries in the region to lower costs, for instance, by using common aircraft maintenance centres and pilot training facilities.
Given these lessons, the question is how do we replicate this success in the finance industry where large unmet demand for financial services has yet to be addressed? The answer is by applying the airline industry's experiences.
Let me lay out five key conditions necessary to develop domestic financial systems and nurture regional financial connectivity.
Analogous to the open sky policy, the first factor is to promote domestic financial liberalisation and a well-integrated regional financial system. Financial liberalisation policy should aim to lessen the degree of domestic financial repression, thereby strengthening financial institutions' performance and broadening their financial products and services. This can be achieved, along with policy to enhance financial connectivity, by promoting the presence of capable players with a regional focus. In April this year, the Thai financial system warmly welcomed a new representative office of Kanbawza Bank from Myanmar.
The second factor is for our countries to invest in financial infrastructure, including a backbone payment system, a digital network and a credit bureau, which will provide a sound basis to develop domestic financial systems and facilitate closer financial ties. The new infrastructure should correspond to technological innovation, notably fintech, which allows us to bypass many phases of traditional financial sector development. This infrastructure should be shared among countries to minimise investment burdens.
The third foundation is to work towards standardised rules and regulations. Given countries' diverse financial systems, the harmonisation of rules and standards should be given priority. In particular, the finance industry should aim to employ internationally accepted principles on finance, which already exist, to help drive harmonisation of rules and regulations in the region.
The fourth factor is development of human capital. We need to redouble our efforts to enhance our banking, finance and technological know-how to catch up with and stay ahead of technological and financial innovation. The long-standing challenges to promote access to basic financial services and improve financial literacy of the public remain a priority. Knowledge and experience should also be effectively shared among countries.
The last factor is to leverage on specialised financial services that some of our members are ready to offer. For Thailand, progress has been made to create a financial ecosystem to meet growing regional demand for specialised financial services. In the capital market, Thailand allows entities from CLMV countries to raise funds from the Thai capital market with the introduction of more accommodating rules on capital account and taxation. Multinational corporations operating in the region are encouraged to establish regional treasury centres in Thailand.
Developing domestic financial sectors and enhancing financial connectivity are vital to the region's economic growth and its ability to ride growth potential while ensuring stability. Such development will reduce business costs and create positive spillovers to several other industries. Livelihoods will improve. Workers and investors will more easily remit funds across countries. Merchants will find it easier to trade. The tourism sector will gain more momentum. Small and medium-sized enterprises will be able to utilise e-commerce and e-payment to sell products regionally and globally. Financing of infrastructure projects can also be supported by long-term financial products. Furthermore, financial inclusion and financial literacy will equip households and small businesses with the resilience to withstand volatile economic cycles.
Building regional connectivity is like planting a tree. In the very same way that a root network helps the tree grow strong and branch out, financial connectivity nurtures all aspects of regional economic integration -- be it trade, investment or tourism. Without a strong root system, it will certainly be difficult for our tree to withstand economic storms in the increasingly volatile world. Like planting a tree with care and dedication, concerted efforts from both the public and private sectors are required to strengthen our economic ties. In this light, the Bank of Thailand is keen to work with our partners to strengthen regional financial ties for the better of the region.
Veerathai Santiprabhob is the governor of the Bank of Thailand. This is an adaptation from his speech on 'Financial Connectivity in CLMVT' at the CLMVT forum, on June 17.