Asean markets’ seething strong arm suspicions

Gary Kleiman February 18, 2017 7:06 PM (UTC+8)
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Asean markets followed a global equity rally for a positive start into mid-February, but political tensions and financial market interference have ratcheted up investor concern. Indonesia’s bitter battle for Jakarta governor, highlighting voters’ ethnic, religious and income differences, is at the forefront in eroding early-year “shelter” status as a domestic demand-driven economy insulated from free trade agreement recoil.

However, leaders in Malaysia and the Philippines have also raised questions about their popularity and hold on power while openly interfering in currency and commodity markets, and Thailand and Vietnam have revisited basic assumptions over constitutional and structural reforms. The urgency of policy and reputation repair has been masked by steady GDP growth numbers amid the share upswing, but fund manager confusion and backlash could soon crystallize and upend the good showings so far this year.

Indonesia was flat on the MSCI Index going into the first round of the Jakarta governor’s race, with the incumbent known as Ahok, a minority Chinese Christian who succeeded President Jokowi there, on the defensive against allegations of defaming Islam. Fundamentalist groups have organized large demonstrations also challenging his record of municipal services delivery, which was widely praised before the purported anti-Koran incident. Even if he wins re-election Ahok could face prison time with conviction on the charges, and his main rival is former President Yudhoyono’s son Agus, who could return power to a military-influenced family dynasty with sparse commercial savvy. Since coming to office President Jokowi has tried to downplay the threat of Islamic extremism, but violence stirred up by the nasty campaign is set to linger after the scheduled end-February finish.

The growth forecast is 5% this year, with corporate profits due to rise 15%, helping to justify the 15 times forward earnings market valuation. Fiscal revenue will increase at least half a percent to stay within the 3% of GDP deficit goal, on the heels of a tax amnesty and higher coal and palm oil export prices which have also improved the terms of trade.

However, officials may have recently gone overboard in taking intrusive steps in the name of currency and securities market stability. They suspended JP Morgan’s dealing license for negative research commentary while embarking on a media pro-rupiah blitz for citizens to show patriotism. The central bank tightened provisions dating from the 2013 “taper tantrum” for companies to hedge dollar exposure six months out, as new 2016 rules went into effect hiking mandatory government bond allocation for state-dominated insurance and pension funds.

In Malaysia, Prime Minister Najib Razak has seemingly contained the fallout from the multi-billion dollar 1MDB fund scandal, especially if the Trump administration is no longer as keen to press US Justice Department cross-border investigations. He has shored up political support by endorsing Islamic Party leaders and precepts, and may call snap elections in the coming months as the mainstream opposition continues to splinter.

A cyclical commodity, consumer, and high-tech export recovery should allow repeated 4% growth this year, partially neutralizing the country’s second place ranking on The Economist’s “crony capitalism index” behind Russia. Nonetheless, foreign banks and investment houses were spooked by the central bank’s ban on offshore non-deliverable forward trading and are wary of further controls, which materialized in recent orders for mandatory 75% company overseas sale conversion into ringgit to bolster value and the broader balance of payments. Against this background, overseas investors have trimmed local debt and equity exposure, especially with a predicted currency drop to 5/dollar based on underlying fundamentals.

A cyclical commodity, consumer, and hi-tech export recovery should allow repeated 4% growth this year, partially neutralizing the country’s second place ranking on The Economist’s “crony capitalism index” behind Russia. Nonetheless, foreign banks and investment houses were spooked by the central bank’s ban on offshore non-deliverable forward trading and are wary of further controls, which materialized in recent orders for mandatory 75% company overseas sale conversion into ringgit to bolster value and the broader balance of payments. Against this background, overseas investors have trimmed local debt and equity exposure, especially with a predicted currency drop to 5/dollar based on underlying fundamentals.

The Philippines grew fastest in the bloc at a near 7% clip, with infrastructure spending a big driver after President Duterte’s team slashed red tape. A jump in household consumption more than offset a 5% export slump, as the information technology outsourcing industry outlook, two-thirds reliant on the US, continues to sour. The President’s drug dealer sweep won approval from his American counterpart despite condemnation of extrajudicial killings from human rights observers, but Manila still plans to increase diplomatic and military distance from Washington and pivot more to Beijing in particular. He has expressed admiration for China’s economic model and ordered the closure of over half the country’s nickel mines on “environmental and social justice” grounds. The Philippines accounts for one-quarter of global supply, but an anti-business crusade motivated yet another form of regional operating interference set to drag stock prices back with a thud.

Gary Kleiman
Pioneer and recognized expert in the field of global emerging economies and financial markets. Founder of first consulting firm dedicated to providing independent analysis and advice to public and private sector clients in 1987, and research coverage and firsthand experience covers 75 countries in all developing regions. Advisor on financial vulnerability issues, risk management, portfolio allocation, and financial sector and capital markets strategy and development.
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