It’s Not Just Trump Casting Cloud Over Southeast Asia Growth

  • Analysts worry political risk could hurt economic growth
  • Markets are already volatile as political events play out

Donald Trump.

Photographer: George Frey/Getty Images

Donald Trump’s protectionist policies aside, rising political risk in Southeast Asia is casting a shadow over economies that have been a driver of global growth in recent years.

Foreign investors pulled out of Thailand stocks at the fastest pace this year in October. The Philippine peso has sunk close to levels last traded during the global financial crisis. Malaysia’s currency is also in a funk.

The common denominator is heightened political risk -- from President Rodrigo Duterte’s stinging attacks on the U.S. and his violent crackdown on crime in the Philippines to the death of King Bhumibol Adulyadej in Thailand that’s removed an anchor of stability in the country. Malaysian Prime Minister Najib Razak, meanwhile, is embroiled in a funding scandal that’s being investigated by authorities around the world.

“Political risk is certainly on the rise in Southeast Asia,” said Bill Hayton, author of The South China Sea: The Struggle for Power in Asia. “The return of geopolitical competition in the region is creating uncertainties that had gradually dissipated following the end of the Cold War.”

The worry for investors is that the uncertainty will stall decision making, and scare off tourists and foreign investors at a time when exports -- the region’s key growth driver -- are already struggling. That’s before even factoring in global risks, like higher U.S. interest rates and a Trump win in elections next week.

So far, the hit has been felt on financial markets, rather than the economy. Capital Economics Ltd.’s Krystal Tan and Gareth Leather said in a research note that they are sticking to their 2016 growth forecasts for the Philippines and Thailand this year, but next year is more uncertain and depends how the politics plays out.

The International Monetary Fund is forecasting growth of 3.3 percent in Thailand next year, 4.6 percent in Malaysia and 6.7 percent in the Philippines. Sovereign risk -- measured by five-year credit-default swaps -- have risen for all three countries since September.

Thailand Risk

“Investors are not happy with the developments in these three countries as it
introduces uncertainty,” said Manu George, a Singapore-based fixed-income director at Schroder Investment Management Ltd., which oversees the equivalent of $424 billion globally. With heightened political uncertainty from the U.S. to Europe, “we are all resigned to the fact that geopolitical risk has risen globally,” he said.

The biggest worry may be Thailand, Southeast Asia’s second-largest economy, where Crown Prince Maha Vajiralongkorn has requested a delay in taking the throne. The country has been under military rule since a 2014 coup with elections due to be held late next year.

Foreign funds sold a net $514 million of Thai equities in October, more than five times as much as from the Philippines. Economists have warned that a year-long mourning period may curb growth on entertainment and other social spending. Airlines and tour operators are bracing for possibly fewer visitors to a country famed for its beaches, islands and nightspots. Tourism makes up about 10 percent of gross domestic product and has fanned a surging current-account surplus.

Worst Performer

In the Philippines, the peso fell to a seven-year low of 48.618 in October and was Asia’s worst performer in the third quarter, when it fell 3 percent. Global funds have pulled more than $600 million from Philippine stocks since inflows this year peaked in August. While government officials have sought to soothe nerves, there are worries the nation’s more than $20 billion business outsourcing industry, which is dominated by American firms, will be hurt by Duterte’s pivot away from the U.S. and toward China.

The use of alleged extra-judicial killings of criminals is hurting confidence, said Celeste Tay, senior sovereign analyst in Singapore at investment manager Loomis, Sayles & Co.

“Such degradation of the rule of law over time could negatively impact foreign direct investment interest in the Philippines and hurt its longer-term economic prospects,” she said.

‘Heightened Tension’

Any impact from Duterte’s statements may be felt in the fourth quarter, local newspaper Malaya reported on Friday, citing Economic Planning Secretary Ernesto Pernia. While foreign direct investment from the U.S. has been weakening, interest from China is picking up, he was quoted as saying.

Malaysia’s uncertainty centers around a global probe into allegations of corruption and money laundering involving state fund 1Malaysia Development Bhd., whose advisory board Najib chaired until May. 1MDB and Najib have repeatedly denied those charges and his domestic support has held up.

To be sure, no one is forecasting an economic crisis just yet and it’s not like the region is new to these kinds of concerns. With the exception of Duterte’s comments, “everything that is happening in Southeast Asia is not particularly surprising,” said Trinh Nguyen, a senior economist for emerging-market Asia at Natixis SA in Hong Kong.

Still, the worry spots are growing against a backdrop of other challenges, such as China’s growing military and political muscle in the region, said Damian Karmelich, managing director of risk firm Political Monitor in Sydney.

“The region is challenged by a number of types of emerging political risks, each of which add to the potential for heightened tension,” he said. “The risk outlook is moderate to high.”

— With assistance by Angus Whitley, Ye Xie, Lilian Karunungan, and Sangwon Yoon

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