Moody's: ASEAN economic integration is credit positive, but progress is incomplete

Global Credit Research 

Moody's Investors Service says that the finalization by members of the Association of Southeast Asian Nations (ASEAN) of tariff liberalization by the end of 2015 is credit positive for the region and will boost intra-regional trade and economic growth. 

"Greater intra-regional trade is credit positive for the region given that growth in other key export markets, such as China, is slowing," says Rahul Ghosh, a Moody's Vice President and Senior Research Analyst. 

The ASEAN Economic Community aims to accelerate integration among ASEAN's 10 member nations through four distinct pillars: a single market and production base, a competitive economic region, equitable economic development, and integration with the global economy. 

Intra-regional trade has reached record highs since the 2007 removal of tariffs for six ASEAN countries—Brunei (unrated), Indonesia (Baa3 stable), Malaysia (A3 positive), the Philippines (Baa2 stable), Singapore (Aaa stable) and Thailand (Baa1 stable). These have been operating tariff-free on 99% of products in the inclusion list. 

The relative strength of intra-ASEAN trade -- which accounts for roughly 24.2% of the region's total -- will reduce the vulnerability of member states to external shocks, says Moody's. 

In addition, the rise in intra-regional foreign direct investment (FDI)—due to ASEAN's successful implementation of various free trade agreements and associated arrangements— to 17.4% of total flows in 2013, from 11.3% in 2007, is another credit positive trend. Intra-ASEAN FDI is a more stable source of funding and insulates the regional economy from external headwinds, says the rating agency. 

"However, other important aspects of the AEC, including the elimination of non-tariff barriers, enhanced regional labor mobility and financial integration, will face delays due to intra-regional disparities, a lack of institutional capacity and a shift in focus towards domestic political issues," adds Ghosh. 

In addition, Moody's expects that the implementation of non-trade aspects of the AEC will face delays and execution risks, suggesting that the wider positive implications of economic integration will take some time to manifest. 

Key issues that hamper full implementation include various disparities among the region's countries such as population size, per-capita income and ease of doing business, as well as structural differences in regulatory and tax regimes, and corporate governance standards, notes Moody's.