“Without Indonesia, it (AEC) would be a half-baked grouping,” CIMB’s Nazir said. Indonesian delay in embracing AEC surprises CIMB chief

Published: Wednesday June 11, 2014 MYT 12:00:00 AM
Updated: Wednesday June 11, 2014 MYT 6:57:21 AM

Indonesian delay in embracing AEC surprises CIMB chief

BY M. SHANMUGAM

“Without Indonesia, it (AEC) would be a half-baked grouping,” Nazir (pic) said.

KUALA LUMPUR: A leading banker has expressed surprise on the delay by Indonesia, which is the economic powerhouse in the region, on embracing the concept of Asean Economic Community (AEC) that among others entails the opening up of the capital markets of the countries in the region.

CIMB Group Bhd managing director and chief executive Datuk Seri Nazir Razak said that in any regional economic integration, the country with the biggest economy had the most to gain.

“For instance in Europe, Germany gained the most in the economic integration. In the case of AEC, Indonesia would be the biggest gainer,” he said at a media luncheon held in conjunction with Invest Malaysia 2014.

The AEC that was conceived in 2007 essentially calls for the opening up of the capital markets in the Asean countries by end-2015.

Its objective is to create a single market across the countries in Asean with the removal of all non-tariff barriers, of which a considerable amount had already been abolished gradually over the years with the implementation of the Asean Free Trade Asean (AFTA).

But what is lacking is the opening up of the capital markets and the financial sector of the countries. So far Malaysia, Thailand and Singapore have complied with the schedule of the AEC while the Philippines is catching up.

However, Indonesia has lagged behind citing that the depth of its capital markets and the regulatory framework not being on par with the rest of region and hence it was not ready yet to fully embrace the AEC framework.

With a population of 240 million, another reason for Indonesia to keep its borders closed to the others in the region is also its large domestic economy that allows the financial institutions to enjoy hefty margins.

Nazir said that the likes of Bank Mandiri and Bank BCA of Indonesia were strong in the domestic market and could also do well outside their domestic market. “They lack taking the plunge to build their presence overseas,” he said.

One reason why the banks in Indonesia are generally comfortable being in the domestic market is that the sector generally enjoys net interest margins (NIMs) of 5% in comparison with their peers in the region that operate in an environment where the margins are half of that.

But Nazir expected the NIMS to come down in the future.

“The NIMs are coming down fast. It takes time to build an overseas franchise … it cannot be done overnight,” he said.

On a lighter note, he said that entrepreneurs from Indonesia had quietly built a presence in the region. “Indonesian entrepreneurs are hugely successful overseas,” he said.

Nazir said that Indonesia’s participation in the AEC was a crucial component to ensure that the economic integration was a credible trade platform.

“Without Indonesia, it would be a half-baked grouping,” he said.

Malaysia will take over the mantle of the AEC next year and towards this end, Prime Minister Datuk Seri Najib Tun Razak announced the proposed establishment of a management office to take stock of the initiatives under the AEC.

Nazir said that it was a move in the right direction and hoped to have better clarity on the AEC inititative by end-2015.

He also said that it was a matter of time before the financial sector would be completely liberalised citing mobile technology as the conduit to break barriers.

“Increasingly people are using the smart devices to conduct their transactions. Branches are losing its allure. The rug is being pulled from under the banking industry,” he said.