Asia: Heightened political uncertainty clouds the outlook - SocGen

Klaus Baader, Research Analyst at Societe Generale, suggests that the political uncertainty as an impediment to economic growth has become a widely accepted tenet.

Key Quotes

“If indeed true, this could spell trouble for the economic outlook in Asia, where political uncertainty and tensions have increased and are set to increase further in many countries across the region. Moreover, in addition to the country-specific uncertainties, a potentially radical shift in US foreign policy following the US election has added a whole new dimension to this uncertainty. That said, the degree to which growth is undermined is clearly variable and depends, critically, on many factors.”

Does it really matter?

“Political tensions are part of everyday life in the vast majority of countries, so their influence is easily overstated. However, political uncertainty can have adverse effects on an economy, and would typically negatively influence long-term spending decisions, such as business investment, but also spending decisions of households — for example with regard to property investment.”

“More importantly for emerging economies, foreign direct investment is especially sensitive to perceptions of political and legal stability. Hence, economies which rely more heavily on such inflows are more at risk. Tourism is another area where perceptions of political stability and personal security play an important role, and heightened political unrest, let alone armed conflict, can lead to substantial reductions in tourism revenue.”

“Portfolio flows are arguably less sensitive to political tension, but they are not immune. To what extent this matters depends on the importance of foreign capital in domestic capital markets. In Asia, participation in local currency bond markets by foreign capital is especially high in Indonesia (39%) and Malaysia (35%), putting these economies more at risk in case of adverse political shocks. As regards foreign participation in equity markets, Taiwan and Malaysia show high vulnerability (at 37% and 31%, respectively) but in Korea nearly one- quarter of the stock market is in foreign hands. Of course, high foreign participation in local capital markets also implies greater vulnerability of the currency although the amount of foreign exchange reserves can provide a buffer.”