Reed Smith Client Alerts

Authors: Gerald Licnachan Matthew Gorman Kendra MacDonald

Executive Summary 2015 was a mixed year for the world’s capital markets and the story was no different across ASEAN. Spread across two client alerts, we take a brief look at the capital markets of each of the ASEAN members, how they fared in 2015 and the outlook for 2016. In the first alert we looked at the markets of the wider Mekong region. In this second alert we consider the markets in ASEAN’s more southerly member nations.

Brunei With Myanmar having launched its exchange in December 2015, Brunei is now the only ASEAN nation that does not have a stock exchange. However, in May 2015, Brunei’s financial regulator, the Autoriti Monetari Brunei Darussalam (AMBD), announced that it was evaluating the possibility of establishing a national bourse.

Despite being one of the world’s richest countries on a per capita basis, Brunei has a population of just 400,000 and is highly dependent on the oil and gas sector. As such, it has been argued that, with such a small population and a narrow industrial base, it will be hard pressed to sustain an economically viable exchange.

However, the AMBD and others feel that a national exchange will encourage diversification away from the oil and gas sector, while also delivering an alternative source of capital for SMEs and improvements in corporate governance generally. It is also felt that Brunei needs an exchange in order to compete with its ASEAN neighbours and to participate fully in any integrated ASEAN exchange that develops.

The AMBD hopes to launch the new exchange in 2017, with the initial focus expected to be on equities followed by both conventional and Islamic (Sukuk) bonds. Currently there are around a dozen domestic entities thought to be interested in listing, including Telekom Brunei and Bank Islam Brunei Darussalam. Whether the nation can realise its objective in 2017 will depend heavily on the progress it makes in 2016.

Philippines Despite being one of Asia’s oldest bourses, the Philippine Stock Exchange (PSE) continues to play catch-up to a number of its ASEAN peers. A purple patch in 2012-2014 gave way to a more modest year in 2015, as the emerging markets’ pullback and other global economic challenges hit the Philippines, in common with other ASEAN markets. There were only four IPOs on PSE in 2015, the most recent being property developer, Italpinas Development Corporation, in December.

Arguably, PSE faces two main challenges when it comes to driving further growth. Firstly, the Philippine banking sector is awash with cash which it is eager to lend to domestic corporates. As such, good credits have little problem raising debt at rates which make equity offerings look pricey. Secondly, PSE offers a relatively narrow range of products, which limits the options it can offer. For example, PSE does not currently provide a platform for the listing and trading of derivatives, and although the regulations were put in place to allow REITs to list, the current Philippine tax rules do not make listed REITs commercially viable.

The most notable event on the horizon for the Philippines in 2016 is the upcoming general election in May. After the popular and successful presidency of Benigno ‘Noynoy’ Aquino, during which the Philippines has enjoyed significant economic growth, there is much riding on his successor. However, given the current uncertainty both around who that might be and how well he or she will perform, it is unlikely that much will happen in the period up to May, which could prove frustrating for PSE both in terms of issuer activity and the pace of reform.

Singapore 2015 proved to be something of a lack-lustre year for the Singapore Stock Exchange (SGX) particularly in relation to equities. There were only 16 IPOs in the year (Main Board 4, Catalist 12). This represents a drop of around 50 per cent compared with 2014, which saw 30 companies join the market (Main Board 12, Catalist 18). Taking into account delistings, the total number of companies listed on SGX actually fell slightly during the year from 775 to 769. More significantly, the total market capitalisation of SGX fell from S$997 billion to S$904 billion during 2015 – a drop of around 9.3 per cent.

Matters have been made even more frustrating by the success of the capital markets in China and Hong Kong, which both had strong years. Notably, SGX which has always been reliant on attracting foreign issuers to supplement a relatively modest supply of domestic issuers, has struggled to compete with its competitors in North Asia in attracting foreign companies. Moreover, it has seen locally-based players like Netccentric Ltd – which joined Australia’s ASX in July – choose to list overseas.

In July 2015, Loh Boon Chye succeeded Magnus Bocker as CEO of SGX, and it will be interesting to see if Mr Loh can steer SGX onto a more positive track in 2016. However, the macro-economic challenges which dominated in 2015 look set to continue, so Mr Loh will have plenty to contend with. In addition, SGX will need to react to the growing challenge being mounted by other ASEAN bourses, in particular Thailand.

Malaysia Bursa Malaysia’s experience in 2015 largely mirrored that of SGX. There were just 13 IPOs during the year (Main Board 9, ACE 4), down slightly on 2014’s total of 15 (Main Board 12, ACE 3). Bursa also saw its total number of listed companies fall from 906 to 903 during the year as delistings outpaced IPOs.

Disappointingly for Bursa, this represented the ninth consecutive year in which the aggregate number of listed companies has fallen – a slide that began in 2008. While the immediate aftermath of the global financial crisis was a tough time for capital markets everywhere, Bursa has not been able to re-ignite its IPO market despite the (albeit modest) global economic recovery that has taken place more recently.

In the last couple of years this can clearly be explained in large part by the collapse in global commodity prices – Malaysia is heavily dependent on the oil and gas sector. The ongoing political situation in Kuala Lumpur has also not helped, with well-publicised scandals such as 1MDB undermining confidence. Coupled with the general pull back from emerging markets, this has all led to a circa 20 per cent fall in the ringgit, which has further exacerbated the situation.

On the positive side, in November, China, Malaysia’s largest trading partner, pledged to help the Malaysian economy in these difficult times. This support will come in the shape of two initiatives. Firstly, Beijing will buy Malaysian government bonds, and secondly, it will allow Malaysia to invest in China's buoyant capital markets through a 50 million renminbi quota in the Renminbi Qualified Foreign Institutional Investors plan.

Despite the abovementioned problems, the Malaysian economy continues to grow at just under 5 per cent per annum with similar growth levels predicted for 2016, and the weakened ringgit is helping exports. However, 2016 is clearly going to be another tough year, with no sign of a short term recovery in commodity prices or the domestic political situation.

Indonesia In Jakarta the IPO market was muted during 2015. The Indonesian Stock Exchange (IDX) welcomed just 18 IPOs during the year, just over half of the 32 IPOs targeted by IDX for the year. This was slightly down on the previous year’s total of 22 IPOs.

In 2014, the number of IPOs was, to a large extent, impacted by the mid-year elections. This tempered activity in the first half of the year, as market participants sat back to see how the elections would unfold. While there was an upturn in the second half of 2014, this momentum failed to carry through into 2015. In part, this can be attributed to the wider global economic issues that have dominated the year, including China’s continued cooling and the looming threat of U.S. interest rate rises. However, the nation has also had internal issues; the thin majority held by the Jokowi government has made it difficult to push through reform, and with a growing current account deficit and a much weakened rupiah, this has exacerbated matters.

IDX is targeting 35 IPOs in 2016. Whether this figure can be achieved will depend on factors both within and outside Jakarta’s control. Certainly, with relaxed listing criteria now in place and the impact of new tax incentives and further deregulation expected to flow through, there are signs that some of the domestic issues are being addressed. Furthermore, IDX has also been working hard to augment its platform generally, with extended trading hours, new products and investor education programs being rolled out. In addition, as the world’s fourth largest nation by population, Indonesia has an internal market far larger than any of its ASEAN peers, which can be expected to add to its growth. However, with an economy so heavily reliant on commodities, 2016 is still likely to be a challenging year, even if growth in the domestic economy contributes strongly.


Client Alert 2016-062