What Does the TPP Mean for Southeast Asian Financial Markets?

With the completion of Trans-Pacific Partnership (TPP) negotiations, economists and policymakers have turned their attention toward the trade agreement’s implications for Southeast Asian economies. Four countries in the region – Brunei Darussalam, Malaysia, Singapore, and Vietnam ­– are signatories of the deal, and, until this point, discussion on both the domestic and international fronts has focused on how each of them will benefit from greater openness to the trade of goods. However, the TPP also includes provisions to liberalize entry into each of their respective service sectors, a component of the agreement that has garnered little attention and that will uniquely impact these countries’ economies. Because liberalization in the services sector has traditionally lagged behind that of the goods sector, the passage of the TPP has the potential to herald a new era of greater openness in Southeast Asia.

The financial services chapter of the TPP, in particular, aims to open member states’ financial sectors to foreign institutions. The provisions in this chapter include many of the standard features found in free trade agreements, such as national treatment, most-favored nation status, and market access. The basic purpose of these tenets is to allow financial institutions from TPP member-states to enjoy the same treatment as domestic financial institutions in host countries.

Financial institutions in more developed TPP countries view Southeast Asian economies as high-potential growth markets. Traditionally, the entry of foreign banks into a region’s financial sector has been heavily regulated. A number of banks – including those from United States, Japan, and Australia ­– have been operating in Southeast Asia for some time, but local regulations have limited their ability to expand. Generally, the TPP is expected both to make it easier for these foreign banks to increase their presence in Southeast Asia and to afford them equal status to domestic banks in regulatory terms.

By making it easier for foreign banks to expand within the region, the TPP could boost the financial services sector of Southeast Asian economies. Foreign banks, with their increased size and global reach, could then take advantage of economies of scale, resulting in lower costs and improved efficiency. The agreement could also stimulate financial innovation by allowing for a greater variety of financial products within the region, ultimately greatly benefitting consumers.

While greater competition could benefit local economies, there are concerns that the TPP will undermine governments’ abilities to regulate their financial service sectors. The TPP is not expected to result in less stringent regulation, and a single, standardized set of regulations cannot be appropriately applied to the diverse financial systems of all TPP member states. Under the agreement, countries will retain the right to tailor domestic financial regulation to fit their respective needs and assume a wide array of measures to preserve financial and monetary stability, for example, by implementing macroprudential policies to limit excessive credit growth. The success of such policies, however, rests in not being viewed by the public – both domestically and internationally – as discriminatory toward foreign banks. To promote greater transparency, however, the TPP calls for greater dialogue among financial regulators, so that the motivations behind policy decisions can be made clear to all member countries.

While the TPP could make it easier for foreign banks to enter the financial services market in Southeast Asia – and while the results of this entry may benefit Southeast Asian economies – attaining market share initially may not be easy. The financial services sector in Southeast Asia is already well developed. In Singapore, banking sector assets represent 300 percent of the country’s GDP – comparable in size to the financial systems of Japan and Australia – which is unsurprising, considering Singapore’s role as a regional financial hub. Furthermore, banking assets in states like Malaysia and Vietnam do not trail far behind those in Singapore, at 210 percent and 160 percent of GDP respectively. This indicates that, generally, the financial services sectors of Southeast Asian financial markets are large and well developed, and may not present much opportunity for foreign banks to enter and expand.

At the same time, the TPP is not the only factor driving greater openness in the region’s financial markets. The ASEAN Banking Integration Framework also aims to more greatly liberalize the banking market in Southeast Asia by opening the region’s banking sector to greater competition. In anticipation of this, Southeast Asian banks have been strengthening themselves by expanding market share to preemptively deter the entry and expansion of foreign banks.

In light of these developments, banks from TPP member-states trying to enter Southeast Asia may encounter tough domestic competition. While they may retain some advantages in international transactions, their edge is rapidly narrowing as other Southeast Asian banks look to expand abroad. While new entrants may find it easier to enter the region, they are joining a crowded and competitive market place.

Indonesia and the Philippines, on the other hand, do represent attractive markets for foreign banks seeking to enter the region. The financial services sectors in these two countries demonstrate strong growth potential, as their banking systems are notably less developed than those of their neighbors. In stark contrast to countries such as Singapore and Japan, banking sector assets as a share of GDP are around 55 percent and 90 percent, respectively. However, there’s a caveat. Neither nation is a member of the TPP, so banks from TPP member-states looking to expand there would not benefit from TPP’s provisions.

Besides banking, there are at least two branches of the financial services sector that exhibit great growth potential in Southeast Asia: insurance and investment management. While the banking sector in Southeast Asia is relatively well developed, the insurance sector is, interestingly, quite the opposite. Foreign insurance firms have an immense opportunity to introduce innovative products in the region, develop this previously untapped market, and, at the same time, have the advantage of being able to diversify their risks globally.

The asset management industry is also relatively underdeveloped. Currently, there is – across the globe – a strong home bias in investor behavior, a phenomenon that is perhaps most clearly observable in Southeast Asia. If more international financial products become available, the region’s investors could consider allocating more of their savings abroad, diversify their portfolios, and mitigate their risks. The TPP is expected to make it easier for foreign firms to introduce insurance services and asset management products to the region by streamlining the procedures by which such services can be approved.

There exists considerable diversity in the level of development of financial systems across Southeast Asia. For some countries, such as Malaysia and Singapore, the banking system – and financial services sector in general – is remarkably well developed. In such cases, the impact of the TPP on domestic financial institutions is likely to be quite limited, as Malaysian and Singaporean banks already dominate their home markets and have even begun to expand regionally. Two other Southeast Asian TPP countries, Vietnam and Brunei Darussalam, have less-developed financial sectors and could – as a result – experience stronger competition from large foreign banks. While some financial institutions could lose market share, consumers will likely benefit from greater access to a wider variety of financial products, including insurance and asset management services, rather than being limited to what is locally available. Because of these factors, the implementation of the TPP will make entry into Southeast Asian financial markets easier, while concurrently not opening the floodgates to foreign investment.