Jonathon Adams Kane lores
Jonathon Adams-Kane
Economist, International Finance and Macroeconomics Research
Capital Flows and Systemic Risk
Dr. Jonathon Adams-Kane is a research economist with the international finance and macroeconomics team at the Milken Institute. His research is mainly on international capital flows and financial stability, with a focus on analyzing structural changes in the international financial system, how crises spread among countries through international banking, and...
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Southeast Asia and the Financial Integration That Wasn’t

By: Jonathon Adams-Kane
October 03, 2016

Southeast Asia has been getting more attention from international investors lately. Some of this is driven more by what’s happening outside the region than within it as slow growth and long-term aging problems in much of the high-income world — and now in China as well — drive interest in the region. But new investors have a lot to learn about the set of countries that makes up Southeast Asia. All too often these countries are viewed as a whole; the Milken Institute’s recently published Global Opportunities Index (GOI) 2016 report shows that foreign fund flows into Southeast Asia’s bonds, in particular, are highly correlated between the region’s countries. But to what extent are these countries a whole? In particular, how financially integrated are they?

One of the big messages that comes out of the GOI 2016 report, and which is emphasized in a recent blog post, is that the highly heterogenous countries that make up Southeast Asia have a lot to gain from financial integration. This is partly due to the region’s heterogeneity itself. Southeast Asian countries vary a great deal in their levels of economic and financial development, economic growth rates and stage of demographic transition, to name just a few factors which have the potential to drive capital flows between these countries. For example, aging populations in countries like Singapore and Thailand accumulate savings, which need to be invested. Young countries with growing working-age populations—e.g., Cambodia, Laos and the Philippines—are filling in gaps in global value chains left by China as its wages rise and the population ages. The region’s largest markets, Indonesia and Thailand, are attractive targets for investment projects aimed at selling to local consumers. Smaller countries like Cambodia are increasingly popular destinations for regional tourists (helped by tough gambling laws in some neighboring countries). And the region even has its very own global financial center, Singapore, together with countries with rudimentary financial systems, and others all along the spectrum in between.

To this list add strengthening intraregional trade linkages, the opening of Myanmar, and the growing need for resilience to shocks originating outside the region (as China slows and a U.S. rate hike looms), and Southeast Asia may now have greater reason to pursue regional financial integration than at any time in its history. Prior to the 1997 Asian financial crisis, the region looked primarily to Japan for financing. Afterward, it looked to the West; at the same time, lessons had been learned from 1997 and balance sheets were diversified and strengthened. As a result, the region was relatively well prepared when the next crisis hit (spillovers from Chinese fiscal stimulus probably helped as well). Now—in a global environment characterized by slow growth, elevated asset prices and general uncertainty—is the time for Southeast Asian countries to look to each other, and to finally pursue financial integration in earnest.

How integrated is Southeast Asia now? When taking this question to the data, regional aggregates can be misleading. Just as flows between China and Hong Kong dominate intraregional capital flow statistics for Asia as a whole, a few key players drive capital flows between Southeast Asian countries. To illustrate this, the GOI 2016 report zooms in on mergers and acquisitions (M&A) between the ASEAN-6 economies (see table).

Mergers and acquisitions in ASEAN-6 countries: number of deals and total deal value in US$ millions, 2002-2015 totals [i]

Asean finance blog table2

Source: The Milken Institute’s Global Opportunity Index 2016 (Adams-Kane, Lopez, and Wilhelmus, 2016); underlying data from Bloomberg.

The data on intra-ASEAN cross-border M&A over the last 14 years show that in the vast majority of deals, Singapore or Malaysia has been home to the acquirer. Similarly, the bulk of targets have been in Singapore, Malaysia, Indonesia (the region’s largest economy, representing an attractive consumer market), or secondarily Thailand. That is, M&A activity between ASEAN’s 10 member countries has largely consisted of two small countries investing in each other and in the region’s two largest markets.

Most M&A deals in the region come from outside. The intra-ASEAN share of the total number of ASEAN’s inward cross-border M&A deals has even decreased, from 40 percent of deals completed between 2002 and 2006 to 26 percent of deals completed between 2010 and 2015. At the same time the intra-ASEAN share in terms of deal value rose from 22 percent to 31 percent, driven by a catching up of average intraregional deal size, which increased from $22 million to $82 million (compared to a change from $40 million to $69 million for ASEAN’s inward deals overall). While larger deals may be a sign of greater sophistication, which in one sense is a promising sign for the future of investment among ASEAN countries, it is sobering to note the context. This space is still dominated by acquirers in Singapore and Malaysia, while the Philippines and Vietnam—and to an even greater degree Cambodia, Laos, and Myanmar—are not integrating.

These latter five countries are populated by over 270 million people—more even than Indonesia—and their economies are growing rapidly. There is significant potential for intraregional FDI, and capital flows more broadly, to play a greater role in financing investment in Southeast Asia; but this will require not only a further intensification of integration between the region’s major players, but just as importantly an expansion of financial integration in the region to its frontier markets.


Adams-Kane, Jonathon, Claude Lopez, and Jakob Wilhelmus. 2016. Global Opportunity Index 2016: Beyond FDI: Lessons from Asia. Santa Monica, California: The Milken Institute.

[i] Deal counts are underestimated due to missing deals and incomplete information on the acquirers’ and their targets’ countries of residence. Deal value is still more underestimated due to missing data on deal value for 25 percent of those deals which have sufficient data to be included in deal counts. Total deal values greater than $1 billion are rounded to the nearest $100 million. Only completed deals are reported. Year attribution is based on date of deal completion rather than announcement. The year 2002 was selected as the start year simply because it is the first year with a large sample of deal-level data on cross-border M&A available from Bloomberg. *More than 80 percent of the total deal value of Thai acquisitions for the period are accounted for by one deal completed in 2013, the acquisition by ThaiBev (primarily in the brewing and distillation business) of roughly a two-thirds share of Fraser and Neave (a diversified company with food and beverage and publishing businesses) for about $8.58 billion.

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