KUALA LUMPUR: The success of the Asean Economic Community (AEC) will depend on cooperation between the countries involved, said Morgan Stanley Investment Banking Group for Southeast Asia managing director Nehchal C Khanna. 

"It will depend on equitable growth, shared access to each other's domestic markets and a respect for national priorities," he said, noting that the value of the AEC lay in generating incremental growth from a single market. 

To a large extent, gross domestic product (GDP) growth within the Asean region have been driven by government spending, but it will now have to be driven by consumer spending, Nehchal said during the 19th Malaysian Capital Market Summit today. Having a single, properly integrated market such as the AEC could create that opportunity.

Nehchal also said the AEC should be given priority over the development of an individual nation's capital market as the effect of the flow of foreign funds in or out of a country can be easily observed. 

"In 2013, there was a huge flight of capital out of emerging markets into developed markets. ASEAN bourses lost billions and this happened because there was a fear that Asia had priced in too much future growth,' he said. 

"This shift of funds can hugely impact the performance of capital markets, which is why how global funds feel about the AEC is important," he added. 

But Nehchal said the biggest challenge would be that of competing tensions between ambition and national priorities. 

"The AEC is not an alternative to local bourses and indexes. It is meant to be something that brings countries together and create more value,' he said. 

Malaysia is set to assume the ASEAN chairmanship in 2015, when ASEAN would be declared an economic community. 

On outlook for the ASEAN region, Nehchal said he is bullish about the economy. 

"However, there are two concerns. Firstly, falling inflation rates. Consumers prices are moderating especially in oil and soft commodities...the response to this is for central banks to cut interest rates. But dropping rates too low will cause global funds to take money out of the region," he said. 

"Secondly, debt is a concern. Total debt today stands at over 200% of the region's GDP, compared with 147% in 2007. At the same time, volatility of fund flows will always impact markets and it cannot be prevented because there are no restrictions,' he added.