IMF completes 2017 Article IV consultation with Vietnam

The Executive Board of the International Monetary Fund (IMF) has concluded the Article IV consultation with Vietnam*. According to the IMF Vietnam’s economy continues to perform well, aided by sound economic fundamentals. Growth moderated to 6.2% in 2016, reflecting the impact of a drought and land salinisation on agriculture and lower oil production. 

Weakness in the oil sector continued in Q117, but the underlying growth momentum remains robust underpinned by strong manufacturing activity and foreign direct investment (FDI), robust domestic demand, and a rebound in agricultural production. Inflation rose to around 5% in early 2017 due to increases in administered prices for health care and education. 

The authorities are developing a broad reform agenda, keenly aware of the limited fiscal space, the need to upgrade the growth model at home, and rising risks of economic fragmentation abroad. Bank reforms have progressed, the IMF notes, but nonperforming loan (NPL) resolution, bank recapitalisation, and legal reforms to strengthen market discipline have been sluggish. Good progress has been made on the legal framework for state owned enterprise (SOE) reforms, but implementation has been slow. The authorities are planning to limit the role of the state in the economy, reduce state ownership in enterprises and encourage private sector-led sustainable growth.

2017 growth is projected at 6.3% and headline inflation is projected to stabilise at around 5% as administered prices continue to be adjusted. The current account surplus is expected to decline somewhat, reflecting stronger imports. While the near-term outlook is positive, there are downside risks including from high public debt, slow NPL resolution, tighter global financial conditions, shocks to external demand, and rising protectionism as well as the failure of the Trans Pacific Partnership. On the upside, successful implementation of the authorities’ ambitious reform agenda could raise growth potential and increase resilience to shocks. Fast implementation of the Vietnam-EU and other bilateral trade agreements would fuel exports and FDI.

Executive Directors commended the Vietnamese authorities for achieving robust growth with low inflation, pushing ahead with important reforms to promote private sector-led growth, strengthening the public finances and tackling legacy issues in the financial sector while making progress on poverty alleviation. Directors noted that risks remain from the slow pace of banking sector reform, continued rapid credit growth and limited fiscal and external buffers. They encouraged the authorities to expand the scope of reforms to safeguard macroeconomic stability, raise growth potential and upgrade the growth model to enhance sustainability and productivity.

Directors welcomed ongoing structural reforms and underscored that Vietnam will need to build a sustainable, modern economy. For this, more extensive policy action is needed to reform institutions and raise potential growth. Reforms of the state-owned enterprise sector and improved outcomes from vocational and tertiary education will also be critical. Directors commended the authorities for ratifying the Paris Agreement and for putting climate change and implementation of the Sustainable Development Goals at the core of their policy agenda.

*Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

At the conclusion of the discussion, the MD, as Chairman of the Board, summarises the views of Executive Directors, and this summary is transmitted to the country's authorities. View explanations of qualifiers used in summings up.

World Economic Forum releases report on new sources of business financing

The World Economic Forum has completed a report on alternative sources of capital for companies.

Alternative Investments 2020: The Future of Capital for Entrepreneurs and SMEs examines the potential for these alternative sources to cause broader industry disruption in the future. 

 

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IMF mission says Pakistani economic reform needs to continue beyond EFF

An International Monetary Fund (IMF) staff mission led by Harald Finger, visited Dubai from July 26 – August 4, 2016 to conduct discussions on the 12th and final review of Pakistan’s economic programme, which is supported by a three-year IMF Extended Fund Facility (EFF) arrangement. The staff team met with Finance Minister Ishaq Dar, State Bank of Pakistan (SBP) Governor Ashraf Wathra, and other senior officials.

At the conclusion of the mission, Finger issued the following statement: “After productive discussions, the mission and the Pakistani authorities have reached staff-level agreement on the completion of the twelfth and final review under the EFF arrangement. The agreement is subject to approval by the IMF Management and the Executive Board. Upon completion of this review, SDR73 million (about US$102 million) will be made available to Pakistan.

“Growth is expected to reach 5% in FY16/17, supported by buoyant construction activity, strengthened private sector credit growth, and an investment upturn related to the China Pakistan Economic Corridor (CPEC). Nevertheless, a challenging global environment and declining exports are weighing on growth prospects. Average inflation is expected at around 5.2% in FY2016/17, remaining well-anchored by continued prudent monetary policy. Gross international reserves reached US$18.1 billion at end-June 2016, covering over four months of prospective imports.

“Programme performance in Q4FY15/16 has been solid. Most end-June 2016 quantitative performance criteria (PCs) were met, although the ceilings on the budget deficit and net domestic assets (NDA) of the State Bank of Pakistan (SBP) were exceeded by small margins. We welcome the authorities’ commitment to take remedial actions in these areas. All indicative targets and structural benchmarks (SB) were met, except for the delayed notification of multi-year tariffs for three power distribution companies.

“In the course of the IMF-supported programme, Pakistan’s economy has made significant progress toward strengthening macroeconomic and financial stability and resilience, and laying foundations for higher, more sustainable, and inclusive growth. Growth gradually accelerated, international reserve buffers have been rebuilt, and the budget deficit narrowed significantly, helped by sizeable growth in tax revenue. Inflation declined, helped by lower oil prices and improved monetary and fiscal policies. Regulatory reforms and improved energy sector performance have slowed the accumulation of arrears and begun to reduce outages. Coverage under the Benazir Income Support Program (BISP) has expanded, and stipends increased by over 60%. Regulations to fight money-laundering and financing of terrorism have been strengthened. Despite some delays, the authorities continue to advance in their work toward restructuring and divesting ailing public sector enterprises (PSEs).

“To consolidate and reinforce the gains achieved in the last three years, the economic reform agenda needs to continue after the programme ends. In this context, it will be important to further strengthen public finances and external buffers, broaden the tax net, improve public financial management, strengthen the monetary policy framework, address losses in PSEs, complete the energy sector reforms, and accelerate competitiveness-enhancing improvements of the business climate, including the trade regime. Continued progress with these reforms will be critical to reinforce the authorities’ achievements under this IMF-supported programme."

End-of-Mission statements of IMF staff teams convey preliminary findings after a visit to a country. The views expressed do not necessarily represent the views of the IMF’s Executive Board.

IMF lists recommendations for economic policy in Japan

Economic growth in Japan has slowed due to weak private consumption and sluggish investment, and inflation has lost its forward momentum, according to the Executive Board of the International Monetary Fund (IMF), which concluded an Article IV consultation* with Japan in late July. While financial conditions remain accommodative, falling stock prices and the appreciation of the yen have resulted in a modest tightening, the board said.

The authorities have responded to the weaker domestic and external economic environment through additional monetary and fiscal support, including the adoption of the negative interest rate policy, plans for additional fiscal stimulus, and the postponement of the scheduled 2017 consumption tax hike by two and a half years.

Nevertheless, the outlook for growth and inflation remains subdued, the IMF said. Private consumption is projected to grow modestly and weakness in the global recovery and trade, higher uncertainty, especially in the wake of the Brexit referendum, and the recent appreciation of the yen will likely pose a drag on net exports and investment. Consequently, the economy is expected to expand at a moderate pace of about 0.3% in 2016, before slowing to 0.1% in 2017, excluding the possible effect of the yet to be adopted economic stimulus package. Over the medium term growth is projected to be in line with potential (which is on a declining trend), while inflation is expected to rise to about 1%.

Low confidence in economic growth prospects is holding back investment and credit demand, while labour market duality and inflexibility are hampering wage growth, the IMF said. The financial sector’s support of risk-taking is limited, and the stop-go nature of fiscal policy and optimistic growth assumptions underlying medium-term budget projections have left fiscal policy without a credible medium-term anchor and are contributing to policy uncertainty. Weak monetary transmission, sluggish wage-price dynamics, and a falling natural rate of interest are preventing the needed rise in inflation expectations, creating a communication and credibility challenge for the Bank of Japan (BoJ).

Global weakness and volatility are complicating matters. Sluggish global growth and overcapacity in the traded goods sector prevented the weaker yen from materially boosting exports. Declining commodity prices failed to boost activity as expected, but instead put pressure on headline inflation and forced the BoJ to repeatedly extend its timeline for hitting the inflation target. Moreover, concerns in emerging markets and revisions to the expected path of monetary policy in advanced economies led to heightened volatility in financial markets and safe haven appreciation pressures.

Executive Directors** welcomed the initial success of Abenomics and the authorities’ forceful implementation of policies to lift growth and inflation. Nevertheless, growth remains subdued and deflation persists, on the back of weak consumption, lacklustre private investment, and sluggish exports. Directors noted strong headwinds from a weak global recovery, the appreciation and volatility of the exchange rate, and adverse demographics. They generally agreed that a comprehensive and coordinated policy upgrade is now needed to achieve the ambitious targets on growth, reflation, and fiscal consolidation.

Directors consider structural reforms an essential component of the reloaded Abenomics, aimed at raising productivity, labour supply, and potential growth. They support labour market reforms to reduce duality and increase labour force participation by female, older, and foreign workers. As part of the overall policy mix, Directors generally saw a role for policies that could help generate wage-price dynamics without excessive interference in market mechanisms. In this regard, they welcomed the decision to lift minimum wage growth, and recommended consideration of options to strengthen incentives for companies to raise wages and promote flexible labour contracts.

Directors also commended the authorities for maintaining a sound and stable financial sector. They noted that financial stability risks could nonetheless arise from prolonged unconventional monetary policies and the delay in achieving reflation and fiscal sustainability. Directors therefore encouraged the authorities to continue to strengthen the macroprudential policy toolkit; and enhance the monitoring of liquidity in the government bond market, financial institutions’ profitability, and foreign exchange risks. Efforts should also continue to improve the resilience of regional banks and inter-agency coordination.

*Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

**At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarises the views of Executive Directors, and this summary is transmitted to the country's authorities. Explore any qualifiers used in summings up

Real GDP growth in KSA to bounce back in 2017

Real GDP growth in KSA is expected to slow to 1.2% in 2016, but recover to 2% in 2017 as the pace of fiscal consolidation eases and to settle around 2.25 to 2.5% over the medium-term. Inflation has risen in recent months to over 4% as energy and water prices have been increased, and is expected to ease to 2% in 2017.

The observations were made by the Executive Board of the International Monetary Fund (IMF), which concluded an Article IV Consultation* with KSA on July 18, 2016. The board noted that bank deposits have declined, but growth of credit to the private sector remains strong. Capital buffers are high, non-performing loans (NPLs) low, and banks are well provisioned against loan losses.

Based on current policies, the IMF says that the fiscal deficit is projected to narrow to 13% of GDP in 2016. Non-oil revenues are expected to increase, while spending restraint, particularly on the capital side, will result in a substantial reduction in expenditure.

KSA has begun a fundamental policy shift to respond to low oil prices. The government has introduced a series of reforms over the past year and has recently set out plans for a bold and ambitious transformation of the Saudi Arabian economy in Vision 2030 and the National Transformation Program. Diversifying the economy, creating jobs for nationals in the private sector, and implementing a gradual, but sizable and sustained fiscal consolidation to reach budget balance in five years are key policy priorities.

Executive Directors** noted that KSA faces important challenges stemming from the decline in oil prices. They welcomed the authorities’ timely response, which, supported by sizeable fiscal buffers and a strong and resilient financial system, has maintained macroeconomic growth and stability. Nonetheless, the fiscal and current account balances have moved into deficit and growth is starting to slow. Directors highlighted the need for continued fiscal adjustment and reforms to strengthen and transform the Saudi Arabian economy. In this regard, they commended the authorities’ bold reform plans.

Directors welcomed the ambitious reform goals announced by the authorities in Vision 2030 and the National Transformation Program, and underscored the importance of clear prioritisation and sequencing of the planned reforms to reduce implementation risks and give the economy time to adjust. They supported the authorities’ plan to increase the role of the private sector in the economy by focusing on privatisation and public-private partnerships, improve the business environment, develop local capital markets, encourage foreign direct investment (FDI), and support small and medium enterprises. Directors noted that continued labor market and education reforms are needed to encourage private sector employment of Saudi nationals and increase labour force participation of women.

Directors agreed that a gradual but sizable and sustained fiscal consolidation is needed, and welcomed the adjustment under way. They generally agreed that balancing the budget over the medium term is an appropriate goal and encouraged the authorities to develop a credible medium-term plan to achieve this objective. They supported expenditure and revenue reforms, including continued gradual adjustment of energy prices with compensation for lower-income households, introduction of a VAT and excise taxes, containment of the government wage bill, and improved public investment management and spending efficiency. They recommended accompanying these measures with growth-enhancing structural reforms.

Directors emphasised the importance of developing a medium-term fiscal framework and strengthening the annual budget process, with better integration of the Public Investment Fund and Aramco into the budget. They encouraged the authorities to take an integrated asset-liability management approach to financing the fiscal deficit. They noted that government debt issuance would help establish a risk-free yield curve and support the development of domestic debt markets.

Directors noted that reforms have helped strengthen the financial system, and the banking sector is well positioned to weather lower oil prices and slower growth. They encouraged the authorities to continue to closely monitor credit quality, strengthen the macro-prudential framework, and finalise the framework for bank resolution and liquidity provision. They also recommended strengthening the liquidity forecasting and management frameworks of the central bank.

Directors agreed that the exchange rate peg to the US dollar is the best option for Saudi Arabia given the current structure of its economy, and emphasised that a continued fiscal adjustment is needed to support the peg. They saw merit in reviewing the peg periodically to ensure it remains appropriate, given the desired evolution of the economy away from its current reliance on oil.

Directors welcomed the improvements in economic statistics, but noted that further work is needed to fill remaining data gaps. Publication of more detailed budget data and updates would enhance transparency. Directors encouraged the authorities to subscribe to the Fund’s Special Data Dissemination Standard.

*Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

**At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarises the views of Executive Directors, and this summary is transmitted to the country's authorities. Read an explanation of qualifiers used in summings up.

UAE dealing well with lower oil prices: IMF

On July 20, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation* with the UAE.

According to the IMF persistently lower oil prices continue to weigh on economic sentiment and fiscal and external positions, but large buffers built over time have provided ample policy space, limited negative inward spillovers and contained the weakening of investor appetite.

Non-oil economic activity has slowed to 3.7% in 2015, driven by a contraction of public investment in the context of fiscal consolidation, and lower contribution from domestic private demand. Negative effects on overall growth were partially offset by the increase in oil production. Despite the strong fiscal policy response to adjust to lower oil prices, the fiscal balance turned to a deficit of 2.1% of GDP, while the current account surplus declined to 3.3% of GDP. Banks remained well-capitalised and liquid, though pressures on profitability are emerging as asset quality weakens due to the economic slowdown and rising funding costs.

The IMF expects economic activity to moderate further in 2016, before improving over the medium term. Non-hydrocarbon growth is projected to slow to 2.4 % in 2016 due to fiscal consolidation, the stronger dollar, and tighter monetary and financial conditions. Over the medium-term, non-hydrocarbon growth is forecast to increase to above 4% as the dampening effect of fiscal consolidation is offset by improvements in economic sentiment and financial conditions due to oil price rises, a pickup in private investment in the run-up to the Expo 2020, and stronger external demand.

Executive Board Assessment**

Executive Directors welcomed the United Arab Emirates’ resilience to the oil price shock. Directors commended the authorities for their prudent policies, which helped build large fiscal and external buffers and strengthened the economy. Nevertheless, persistent lower oil prices continue to pose challenges. Directors underscored the need for sustained sound macroeconomic policies to reduce fiscal vulnerabilities, safeguard financial stability, and promote long-term growth.

Directors welcomed the authorities’ commitment to pursue fiscal consolidation. For the near term, in light of the ample buffers, they generally considered a gradual adjustment effort to be appropriate in order to minimise the negative impact on growth. However, stronger fiscal consolidation will be needed over the medium term to ensure inter-generational equity.

Directors encouraged the authorities to diversify revenues and rationalise current spending, while further strengthening public financial management. They welcomed the plans to introduce a VAT and increase excise taxes, which could be followed by a corporate income tax. Directors also recommended phasing out remaining energy subsidies, while protecting the vulnerable. Priority should also be given to curb other current spending, while preserving public investment and enhancing its efficiency. Directors noted that developing a consolidated forward-looking medium-term fiscal framework would assist the authorities in setting direction for fiscal policy, and in aligning resource allocation with the UAE 2021 vision. They encouraged the authorities to strengthen the debt management framework to better account for contingent liabilities from government-related entities and public-private partnerships.

Directors noted that the dirham peg to the US dollar remains an appropriate anchor for price and financial stability. They supported continued efforts to enhance the monetary framework, particularly by improving liquidity management. Directors encouraged further steps to develop domestic debt markets and reduce private sector foreign exchange exposure. They also encouraged the authorities to tap into sovereign wealth funds and international capital markets to finance the deficit.

Directors welcomed the ongoing revision of the central bank and banking law and plans to strengthen banking regulation and supervision. They emphasised that the new law should further enhance central bank independence and governance, align the macroprudential institutional framework with best practices, upgrade banking sector regulation and supervision in line with global standards, strengthen safety nets, and improve the resolution framework. Directors encouraged the authorities to implement their plans to phase in the Basel III capital framework, enforce loan concentration limits, strengthen corporate governance, and move toward risk-based supervision. They supported ongoing efforts to strengthen the anti-money laundering and countering financing of terrorism (AML/CFT) framework and address de-risking.

Directors commended the efforts to further diversify the economy away from oil. They encouraged continued action to increase productivity and foster competitiveness. Efforts should continue to improve the business environment, ease restrictions on foreign direct investment (FDI) in the new investment law, and spur competition. In addition, priority should be given to upgrading the quality of education, promoting innovation and entrepreneurship, and facilitating SMEs’ and startups’ access to finance, notably through an approval of the bankruptcy law and further broadening the credit bureau’s coverage.

*Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

**At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. Read the qualifiers used in summaries.

World Economic Forum sounds alarm over economic resilience in global competitiveness report

Source: World Economic Forum.

A failure to embrace long-term structural reforms that boost productivity and free up entrepreneurial talent is harming the global economy’s ability to improve living standards, solve persistently high unemployment and generate adequate resilience for future economic downturns, according to The Global Competitiveness Report 2015-2016*.

The report is an annual assessment of the factors driving productivity and prosperity in 140 countries. This year’s edition found a correlation between highly competitive countries and those that have either withstood the global economic crisis or made a swift recovery from it. The failure, particularly by emerging markets, to improve competitiveness since the recession suggests future shocks to the global economy could have deep and protracted consequences.

The report’s Global Competitiveness Index (GCI) also finds a close link between competitiveness and an economy’s ability to nurture, attract, leverage and support talent. The top-ranking countries all fare well in this regard. But in many countries, too few people have access to high-quality education and training, and labour markets are not flexible enough.

First place in the GCI rankings, for the seventh consecutive year, goes to Switzerland. Its strong performance in all 12 pillars of the index explains its remarkable resilience throughout the crisis and subsequent shocks. Singapore remains in 2nd place. Japan (6th) and Hong Kong SAR (7th) follow, both stable.

Among the larger emerging markets, the trend is for the most part one of decline or stagnation. However, there are bright spots: India ends five years of decline with a spectacular 16-place jump to 55th. Macroeconomic instability and loss of trust in public institutions drag down Turkey (51st). China, holding steady at 28, remains by far the most competitive of this group of economies. However, its lack of progress moving up the ranking shows the challenges it faces in transitioning its economy.

Among emerging and developing Asian economies, the competitiveness trends are mostly positive, despite the many challenges and profound intra-regional disparities. While China and most of the Southeast Asian countries are performing well, the South Asian countries and Mongolia (104th) continue to lag behind. The five largest members of the Association of Southeast Asian Nations (ASEAN) – Malaysia (18th, up two), Thailand (32nd, down one), Indonesia (37th, down three), the Philippines (47th, up five) and Vietnam (56th, up 12) – all rank in the top half of the overall GCI rankings.

It’s a mixed picture in the Middle East and North Africa. Qatar (14th) leads the region, ahead of the UAE (17th), although it remains more at risk than its neighbour to continued low energy prices, as its economy is less diversified. These strong performances contrast starkly with countries in North Africa, where the Levant is led by Jordan (64th). With geopolitical conflict and terrorism threatening to take an even bigger toll, countries in the region must focus on reforming the business environment and strengthening the private sector, the WEF said.

“The fourth industrial revolution is facilitating the rise of completely new industries and economic models and the rapid decline of others. To remain competitive in this new economic landscape will require greater emphasis than ever before on key drivers of productivity, such as talent and innovation,” said Klaus Schwab, Founder and Executive Chairman of the World Economic Forum.

“The new normal of slow productivity growth poses a grave threat to the global economy and seriously impacts the world’s ability to tackle key challenges such as unemployment and income inequality. The best way to address this is for leaders to prioritise reform and investment in areas such as innovation and labour markets; this will free up entrepreneurial talent and allow human capital to flourish,” said Xavier Sala-i-Martin, Professor of Economics at Columbia University.

Interested?

Read The Global Competitiveness Report 2015-2016 

Hashtag: #GCR15 

*The Global Competitiveness Report’s competitiveness ranking is based on the Global Competitiveness Index (GCI), which was introduced by the World Economic Forum in 2004. Defining competitiveness as the set of institutions, policies and factors that determine the level of productivity of a country, GCI scores are calculated by drawing together country-level data covering 12 categories – the pillars of competitiveness – that collectively make up a comprehensive picture of a country’s competitiveness. The 12 pillars are: institutions, infrastructure, macroeconomic environment, health and primary education, higher education and training, goods market efficiency, labour market efficiency, financial market development, technological readiness, market size, business sophistication, and innovation.

EY outlines challenges hindering an effective AEC

Political, legal and organisational complexities and regulatory burden, as well as the lack of uniform and harmonised trading rules among the ASEAN nations, are hampering the progress of the 2007 ASEAN Economic Community (AEC) Blueprint, which seeks to achieve regional economic integration by 2015, says EY.

A new EY report, Trade Secrets: ASEAN economic community and inward investment, explores the progress of the AEC through the eyes of business, in particular, at the impediments to doing business in ASEAN. According to the “ASEAN Economic Community Scorecard 2012”, only two-thirds (67.5%) of the targets for an integrated economic region by 2015 have been met.

Mildred Tan, EY’s Asean Government & Public Sector Leader says: “This is perhaps unsurprising, given the economic diversity and varying growth maturity in each of the member countries. At the same time, we often see that national and local priorities supersede regional initiatives, obscuring wider goals. While macro problems persist, on the micro level, there are many areas where solutions can be applied.”

On the other hand, the business community has also been lukewarm towards the overall progress of the AEC. The reasons are three-fold: first, business require greater clarity on inter-government collaboration; second, the business community prefers to deal directly with each other; third, a need for stronger focus from governments on prioritizing and solving the problems, particularly those directly relating to investment and business operations.

“Businesses can be both the beneficiary and the facilitator of the AEC. Often, public-private consultation holds the key to unlock the value of any transformation. By examining the impediments to doing business in ASEAN from the business’ perspective, we hope to offer pragmatic policy and implementation recommendations to governments,” said Tan.

One of the biggest challenges that investors face in setting up businesses in ASEAN is the need for clarity and certainty in local laws, government policies and legal environment. Examples of such uncertainty are amendments to important legislations with little notice, arbitrary interpretation of laws or policies, and outdated rules and regulations.

Other issues that plague businesses and investors in ASEAN include complicated procedures and long delays in starting up businesses, multilayered approvals for licenses, legalisation of documents, regulatory requirements, foreign ownership restrictions, politics and bilateral relations.

Sophia Lim, Director of Corporate Secretarial Services – Global Compliance & Reporting at EY shares that the most logical and effective solution is to amend policies for ease of starting business. “Simplification and clarity are key. A three-pronged approach at the regional, national and local government is needed. ASEAN countries could look into the standardization of regulatory processes and information requirement, and having a one-stop registry exchange and an ASEAN business portal. There also needs to be continual dialogue between business and policy-makers, and among jurisdictions within the same country and across countries.”

Two of the important issues affecting intra-regional trade in ASEAN are the various entry barriers and the need for certainty in obtaining and retaining preferential tariff concessions under the ASEAN Trade in Goods Agreement (ATIGA).

Tariffs on imported goods are generally a barrier for businesses. In line with the ATIGA schedule, six ASEAN member states – Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand – have eliminated tariffs on almost all goods that are produced in the region, while newer members such as Cambodia, Laos, Myanmar and Vietnam are committed to eliminate tariffs on such goods by 2015, with some flexibility to extend the deadline to 2018.

However, the free flow of goods in ASEAN has yet to become a reality, given existing non-tariff barriers to cross-border trade. For example, while ASEAN has established a common eight-digit tariff classification system, in practice, it is still common for importing customs authorities to adopt differing product classifications and deny benefit of ATIGA preferential duties. This is on top of other gaps, including the disparity in the time taken for goods to clear customs checkpoints, which can range between four days and 26 days across ASEAN countries, resulting in unnecessary costs and inefficient and unpredictable supply chains.

Shubhendu Misra, Partner, Indirect Tax – Global Trade at EY in Singapore comments: “Having uniform and harmonised trading rules, as well as eliminating varying and often opaque administrative practices and protectionism, is important. This, combined with the inherent lack of trust in the trading community by pockets of customs administration, is curtailing the full benefits of free trade.”

Misra adds that the recent WTO Agreement on Trade Facilitation will provide an excellent reference for ASEAN to embrace and implement as part of the run-up to the AEC. “Many of the trade facilitation measures forming part of the WTO Agreement are in areas where ASEAN currently lacks. Early adoption by ASEAN on a unilateral basis would send a strong signal to the world that ASEAN is open for business,” he said.