Asia’s Ineluctable Election Whirl
The three stock markets in election mode were on average behind the MSCI EM Asia’s index 9% jump through February, with only Thailand around that mark while India lost 2% and Indonesia was ahead 3%. Incumbents, including Prayuth Chan-ocha as the military ruler vying to head a civilian government, are favored, although Indian Prime Minister Narendra Modi and Indonesian President Joko Widodo find themselves in unexpectedly close races with their economic growth and reform platforms offering mixed records. Both promised 7% gross domestic product expansion, and the former has been accused of fudging that figure while the latter consistently fell 2% short of his campaign target. Foreign investors are largely on the sidelines pending the outcome, as they plough money into index heavyweight China on the rebound with a new “A” share wave scheduled to join. They prefer also to add positions in Pakistan, up 10% with Gulf Arab money offering a rescue as International Monetary Fund talks continue. A Kashmir border skirmish after early fright was cast mainly as another Indian poll risk. Even with solid second term victories, the trio will remain outside immediate embrace so long as banking, debt and competitiveness woes persist, especially since they are glossed over in otherwise rousing candidate rhetoric.
India media surveys show 80% expectation that Prime Minister Modi and his National Democratic Alliance will keep a lower house majority in April, with the Rahul Gandhi-led United Progressive Alliance the chief rival. The contest is estimated to cost $8.5 billion, double the amount five years ago, and the ruling government following longstanding tradition has primed the fiscal and monetary pumps to secure voter support. Negative consequences will be overlooked until later this year, when state and federal budget deficits and bank double-digit bad loan ratios will again be in the headlines. The last official quarterly GDP report had growth slipping half a point to 6.5% at the end of 2018, with the leaked unemployment rate at a multi-decade peak of 6%. Public statistics, attempting to mix formal and informal economic measures, otherwise underscore the current coalition’s outperformance on national account indicators despite several agency resignations in protest over methodology. A main exception the politically-sensitive farm sector, is “under stress” according to analysts as food prices stay low to restrain inflation. To pre-empt criticism, the Prime Minister was ready with a transfer package of $10 billion to strengthen rural incomes, supplemented by middle class tax breaks to appeal to that constituency.
The central bank cut the benchmark rate 25 basis points in early February, and also agreed to increase the direct budget dividend to $4 billion to retain the 3.5% deficit goal as feasible in principle. The moves smacked of an election ploy and continued acquiescence by the nominally independent body to outside pressure under new governor Shaktikanka Das, a close Modi ally. In February more money was injected into public banks, but Moody’s Ratings warns the system needs further cleanup and acts as a restraint on future growth likely to top out at 7%. Following the default of investment-grade infrastructure lender IL&FS the non-bank “shadow” segment, where balance sheets ballooned 20% annually in recent years, is also in crisis with wholesale borrowing frozen and resolution postponed until after the elections.
In Indonesia a March reading has President Jokowi with a 20% margin over opponent Prabowo Subianto, with a clear urban-rural divide. The challenger has attacked over the current account deficit at 3% of GDP, and rising external public and private debt levels which cramp the currency, and predicts an upset as with Malaysian President Mahathir’s surprise triumph. Jokowi in turn touts anti-poverty programs and hundreds of billions of dollars in infrastructure spending, low 2% inflation and his hands-on decision-making style. However away from the political battle fund managers are heavily focused on a court fight over unpaid debt between Austria’s Raiffeissen Bank and a unit of the Lippo conglomerate controlled by the wealthy Riady family, and that outcome which will help dictate future allocation. In Thailand after the Royal Princess was disqualified as a contender General Prayuth and his party appear to have the fix in, but even if successful an economy policy correction is overdue with lackluster 3% growth. He may be the frontrunner for end-March voting, but large contingent fiscal liabilities after numerous army-directed outlays have yet to be tested commercially and democratically.
