East Asian markets’ political upset procession

After outperforming China and India which both had losses through end-April, East Asian stock markets have been shaken by election and leadership surprises that may stall momentum through mid-year amid flat economic growth forecasts.

The runaway presidential victory of Davao City mayor Rodrigo “Dirty Harry” Duterte in the Philippines was the latest investor confidence blow and was preceded by the ruling party’s parliamentary majority surrender in Korea and the resignation of the 1MDB fund board headed by Malaysian Prime Minister Najib Razak after payment default.

ADB growth projections

The Asian Development Bank, on its 50^th anniversary, also sounded downbeat about ASEAN in particular as it kept this year’s growth projection constant at 4.5%. It cited demographic, education, labor and productivity challenges shaving two points from potential expansion since 2010, alongside the fallout from China’s commodity and manufacturing import slowdown and increased domestic public and private sector debt. The bank added that institutional governance and policy vision have been lacking the past decade, and these shortfalls may be magnified in the near-term with the country muddles now in the way of continued share gains.

Manila was up just 2% in dollar terms on the MSCI Index before the May presidential poll, and $40 million in foreign investor outflows were registered by data trackers in April. The peso slid to 46/dollar and sovereign credit default spreads rose to 100 basis points, as the flagship exchange-traded fund in New York was down 7 % in the new quarter.

Duterte stock rebound

The stock exchange recovered in the immediate aftermath of the results with Duterte’s decisive margin over opponents. The losers included two closely aligned with outgoing President Aquino’s economic approach — former Senator Grace Poe and his favored successor Mar Roxas, another son of a previous incumbent. The mayor ran Davao on southern Mindanao island for over twenty years under a tough law and order regime during a rebel insurgency, and promoted national and regional trade and investment. But unlike rivals, he had no detailed business platform during the campaign other than to create “the proper atmosphere.”

Duterte promised to clean up crime and infrastructure in the overcrowded capital and across the country, and railed against the family industrial and political elite traditionally in charge without calling for outright income redistribution. His speeches offered muted praise for technocrats at the planning and finance ministries and central bank, and embraced the public-private partnership concept while pressing project tender changes that uphold transparency. His core voting bloc was the rural poor, living on less than three dollars/day, who have not felt the effects of consecutive years of 6% growth and resent the wide wealth gap compared with neighbors and emerging economies in other regions.

Duterte will take office as both an economic and foreign policy unknown. He has proposed to confront China in the South China Sea in offhand comments. He may also turn confrontational toward the exiting administration’s macro-stabilization and anti-corruption strides which have waned over the past year.

Graft and intrusive bureaucracy remain endemic in the Philippines as reflected in the 103 out of 189 country ranking in the World Bank’s Doing Business, and exports, one-third of GDP, have fallen for twelve months straight. The chronic trade deficit has historically been offset by booming remittances, but they have peaked to almost eliminate the current account surplus. International capital flows have long been volatile, but domestic demand softened during the election period with the central bank at a crossroads over its future monetary stance.

Malaysia

Malaysia’s MSCI component showed a high single-digit advance through April, a slip from over 10% the previous month as IMDB failed to honor a $50 million bond payment to an Abu Dhabi holder. Multiple jurisdictions continue to probe missing accounts, with the Swiss suggesting $5 billion diverted.

The advisory board was dismantled and PM Razak was stripped of final signatory authority although he has quashed resignation demands. However his brother, chief executive of leading Islamic bank CIMB, was forced out by the controversy. At the same time a new central bank chief was named likely to cut interest rates to boost 3.5% growth, and clamp additional controls on 90% of GDP household debt while political houses stay unsettled.

Gary N. Kleiman is an emerging markets specialist who runs Kleiman International in Washington, D.C.