Asia: Election Fever and High Inflation Impact
The political scene in most of Asia is dominated currently by two themes – election fever and addressing either a high inflation environment or battling tight financial conditions. Political volatility remains moderate in the region given that world’s largest democracy – India, is heading to elections.
Alongside India, its neighbor Pakistan’s elections are due in October, which will likely stoke violence there. Indonesia too is gearing up for elections in early 2024 and the political landscape there is also tense. In the past quarter, political risks were elevated in Asia given unpopular policies (such as tighter fiscal reforms, higher interest rates) amid a cost of living crisis. While Asia has weathered the negative fallout from the Ukraine conflict and the monetary tightening conditions better than other regions, the elevated price levels in several countries is now weighing on consumer sentiment. High prices have eroded purchasing power and consumer spending is declining. Adding to this was currency volatility in light of divergent monetary conditions globally.
Although Asia too saw the 2022 commodity price rally weigh on the countries’ public finances and pinch household incomes into 2023, a major concern came through in the form of depreciating currencies, as the U.S. Federal Reserve continued with its aggressive monetary tightening stance. The Asian currency sell-off weighed on countries who were simultaneously witnessing the impact of high input costs and waning pent up demand. As a consequence, still elevated inflation (particularly food inflation) alongside tougher policy moves could stoke tension within and among these countries.
On the other hand, any new conflict in any of Asia’s leading economies is not on the horizon. Although risks have been elevated in the South China sea, given China’s movement around Taiwan, the former is unlikely to start a conflict, amid the authorities focus on a domestic recovery. China stated earlier this quarter that it is not looking to stoke conflict with Taiwan. China will likely also support opposition parties in Taiwan that are gain ground on the ruling hardline Democrat People Party (DPP) ahead of next January’s election. However, some skirmishes have been observed between India and China along the border. In India’s north east, border tensions were elevated given China’s claim on Indian territory. The skirmishes will persist in the near term but an open conflict is not on the cards.
Elsewhere, a fluid picture is observed in Pakistan. The country was recently provided an IMF financial package to avoid debt default. However, the macroeconomic situation in the country is adverse. High inflation levels have led to people protesting on the streets and a massive backlash against the government. The austerity measures introduced by the government to secure the IMF deal too exacerbated the public’s dire circumstance and have further fuelled the anti-government sentiment. The military continues to hold influence in the political sphere in Pakistan, which suggests that the upcoming elections in October are unlikely to be free or fair. The ruling party will likely secure a win in the election with support from the military though. Additionally, the number of terrorist attacks in Pakistan have been on the rise. Balochistan region and the border with Afghanistan remain high risk areas. Pakistan has held talks with Afghanistan given increasing concerns of cross-border terrorism activities. In Afghanistan though the story is different. The Taliban militia, which seized the capital, Kabul in 2021 continued to retain control of much of the country. While there was anti-taliban resistance movements, these have turned mellow since mid-2022, and are not making any headway given that Taliban continues to overwhelm any rebel forces. Resistance to Taliban’s rule therefore remains limited to small pockets in the country (some villages in the Panjshir valley). Any strong resistance is unlikely to come together in the near term. The resistance has also failed to attract any support from other central Asian countries, which now are engaging with the Taliban in the hopes of maintaining regional stability.
Meanwhile, the situation in Singapore although stable for now, is evolving. The cost of living crisis, supply constraints and elevated housing prices have stoked public dissatisfaction with the government. Singapore’s tight social laws ensure that no security lapses occur and public protests remain low. However, the ruling party’s popularity continues to wane as it battles economic woes.
Elsewhere in SE Asia, countries which have held elections this year are struggling to form or retain power in parliament. In Thailand for instance, the leading party with the most votes, the Move Forward Party is finding it challenging to form a government. While the public demands a move away from the military-aligned government and a constitution amendment to make parliament more democratic, the political landscape in the country remains fluid for now. Despite winning the highest number of seats, the MFP is struggling to form a new government. The existing constitution currently mandates that the selection of the new prime minister involves the participation of 250 senators, who were appointed by the military following the 2014 coup, along with 500 members of parliament from the lower house. Pita Limjaroenrat, the leader of the MFP party and a businessman, has formed a coalition consisting of eight parties, including the PTP, with a total of 312 votes (out of 250). However, this falls short of the required 376 votes. The main obstacle lies in the MFP's commitment to reform the monarchy and the military, which has become a significant point of contention. Despite the MFP's attempt to find a compromise by excluding monarchy reform from the memorandum of understanding issued with the coalition partners, it is still uncertain whether the party will garner enough support from the Senate. This has created room for the other party with similar vote share, the Pheu Thai Party (PTP) to lead a coalition government. For now though, Thailand appears to have a political vacuum. The possibility of a military led coup cannot be ruled out as well given Thailand’s history.
Meanwhile in Malaysia, which held elections in November 2022, Anwar Ibrahim, the leader of the Pakatan Harapan (PH) coalition, which represents a diverse range of ethnic groups, is attempting to head a unity government. Ethnic-Malay identity politics continues to exert influence in the coalition, constraining Anwar's progressive inclinations and finding a consensus is becoming increasingly challenging. To maintain a workable parliamentary majority, Anwar has made commitments to preserve preferences for ethnic Malays, such as not altering their wealth ownership requirements. Deviating from this stance could lead the pro-Malay bloc to withdraw from the government. Additionally, the pro-Malay faction is likely to resist attempts to limit the prime minister's tenure to two terms. Therefore, the government’s priority for now is to ensure the unity government holds.
Myanmar’s political instability persists as a civil war rages in the country. According to the UN about two million people have been displaced due to the ongoing war and about 40,000 alone were displaced in June. Myanmar has been engulfed in a civil war since February 2021, when the military coup took place and overthrew the democratically elected government. Since then the junta forces have encountered strong resistance from ethnic armies and local anti-regime groups. They have been met with repressive tactics and the fighting is persisting. Air strikes on the resisting forces continue leading to further security issues. An airstrike by junta forces on Mindat's Wun Khone village on July 8 resulted in the killing of three civilians, including a child. In Moebye township, located in southern Shan state, clashes between junta troops and ethnic Karenni joint forces have made it extremely challenging for internally displaced persons to access food due to the military's ban on rice transportation to the area. This suggests that stability is a far stretch for Myanmar for now and that any political stability in Myanmar remains unlikely in the medium term.
In neighboring Bangladesh too, all is not well. As the country battles economic woes such as cost of living crisis, a decline in economic activity given the global slowdown and poor living conditions, the political landscape is tense. Bangladesh has experienced a decline in political stability since mid-2022, despite the ruling Awami League (AL), led by Prime Minister Sheikh Hasina Wajed, dominating the parliament. In December 2022, protests emerged demanding fresh elections to be held under a neutral caretaker government. Ongoing nationwide anti-government demonstrations are expected this year in the run up to the elections in January 2024. These protests are driven by increasing cost-of-living pressures and structural reforms mandated by the IMF which may include potential increases in fuel and electricity prices in mid-2023. Space for political opposition remains constrained in Bangladesh and therefore these protests will be met with repressive tactics. A change in government is unlikely, and as a consequence, Bangladesh’s security situation will remain compromised in the near term.
Meanwhile, across the border, an outperformer in Asia, is India. The Modi-led government continues to have a tight hold on the political landscape and appears to be on track for another electoral win in May 2024. There is little competition from opposition in the run up to the 2024 general elections. The opposition has formed a new coalition, which includes about 10 regional parties and the Indian National Congress (leading opposition party at the national level) to counter Mr Modi’s influence. However, marrying the varied interests of so many regional parties is going to be a challenge and will therefore not affect Mr Modi’s prospects in the elections. The country saw its inflation trend downward and growth momentum sustain over the first half of 2023, and consequently, protests from the public due to social concerns remain low. The government appears to have handled both the global economic crisis and the monetary tightening crisis well so far. The domestic manufacturing and business sentiment remains strong. Communal clashes though are likely over 2023 and will stoke security concerns in specific states intermittently. This includes the states of West Bengal, Karnataka, Punjab etc, where the ruling BJP does not hold a majority. Outside of this, India remains at a risk of a resurgence in clashes with its neighbors both Pakistan in the west, and China is in the north, and the north east. Over the last quarter, India saw a resurgence in clashes with China in the north-east part of the country. However, this was quickly subdued. A war with Pakistan appears unlikely, however, India may continue to face terrorism related incidents in the northern states of Jammu and Kashmir.
Overall though, Asia’s political stability picture stable for now, with incidents of instability where these countries have elections. The probability of an open security conflict or a spillover of domestic conflict into the overall region appears low.