In contrast to América Latina where economic inequality is giving rise to left-leaning leaders through “change elections,” there isn’t one unifying theme for Asia in the coming year.
In some ways, Asia has already gone through its series of change moments:
- India: When Prime Minister Narendra Modi came to power in 2014 and delivered the first majority government in over 30 years
- Thailand: The coup in 2014 and the rise of Duterte in Philippines in 2016
But these drivers of change in Asia were not always economically oriented and instead were about each country re-gaining past glory. For India and China in particular, Modi and Xi Jinping represent a desire of each country to harken back to a time when they were the dominant economic, cultural and military powers of the region. Both leaders speak of a need to rebuild their countries and undo the effects of detrimental policies of the past.
Looking ahead, the drivers of politics, policies, economics and risk vary by each country in Asia. In general, economic performance may be “status quo,” where emerging markets in Asia will experience higher levels of growth than the developed world. But it may be a post-pandemic trend growth rather than a consequence of liberalization or reforms. So, no one country may see off the charts 10+% GDP expansion.
Security issues like terrorism, country disputes, domestic strikes, riots and protests will likely be consequential in the year ahead. Some of this will be on account of upcoming elections, as well as continued deterioration in ties between China and most of Asia and complex geopolitical fault lines.
India: State Elections Dominate
India Risk Events for 2022
- Emphasis on social issues over economics
- Ongoing security challenges with both China and Pakistan
- Higher interest rates
The Backstory
While national elections are paramount in India, state elections are tremendously consequential given the country’s federalist system – similar to the U.S. These elections are also important because many states are as populous as some major countries.
One particularly important state is Uttar Pradesh, or UP, which has a population of 240 million people. UP held its election in early 2022. If a party can sweep all 80 seats that UP sends to parliament during a national election, it is nearly guaranteed the ability to win the overall election, which is what Prime Minister Narendra Modi’s BJP did in 2014 and 2019. In turn, the state assembly elections in UP provide a key barometer for the political health of an incumbent prime minister.
However, there were indications that Modi was worried heading into the UP election despite his personal approval rating of 70% at the national level.
Our team has developed a series of proprietary models assessing various forms of risk. We also have more nuanced models ascertaining drivers of various forms of political violence. Per our model, the “Support for Leadership” score for India was an impressively high 1.5 (1.0 is the best / 10.0 is the worst), which means at the national level, the Modi government remains very popular. But why is Modi worried?
First, while the economy is growing fast, COVID-19-related headwinds persist. Second, in 2021, Modi attempted to reform the nation’s agricultural sector by liberalizing the industry, which faced tremendous – and at times violent – push-back from farmers, many of whom are based in states like UP. The farmers felt that opening agricultural markets could affect their livelihood. Late last year, Modi annulled the reforms to appease farming-based communities, which was also a sign that he was worried about his party’s prospects in UP.
The reversal on the farm laws shows that economic reforms can be controversial in India, and politicians may be reluctant to engage policy liberalization ahead of major elections. We anticipate that major economic reforms will be off the table in 2022 and could pick up once the state elections are out of the way.
However, privatization of state-owned enterprises may accelerate following last year’s sale of Air India. Notably, privatizations are not as controversial as they once were. Given India’s widening fiscal deficit, the government will be focused on trying to raise revenue from all avenues.
Meanwhile, the ruling government may focus on cultural and social issues, with an emphasis on national security, to shore up their standing ahead of the state elections. Historically, these issues have enabled the ruling party to win over voters. While this could increase the potential for political violence, it may not hurt the economic outlook.
We anticipate consumption and ongoing government stimulus to continue to support economic growth. Much of this stimulus continues to be aimed at infrastructure projects. This could remain in the 8% to 9% range, making India the fastest growing major economy in 2022.
The fiscal deficit will likely remain wide. However, there are indications that the government will try to lower it to below 7% of GDP – a far cry from earlier goals of reaching 3%. As noted, part of the funding gap will likely be met by an increased emphasis on privatizing state-owned enterprises.
We also anticipate the Reserve Bank of India (RBI) to begin raising rates this year with higher inflation and normalizing economic conditions. This, coupled with a potential increase in bond supply given the higher deficits, could increase overall yields in India.
On the political violence front, the end of farmer protests helps ease the risk of strikes, riots and civil commotion. But election-related violence could rise. Plus, terrorism-related risks will continue to be a threat, particularly now that the Taliban are back in power in Afghanistan.
In the 1990s, Pakistan leveraged its relationship with the Taliban to train militants in Afghanistan and deploy these proxy groups into India’s portion of Kashmir. Sadly, we could see a repeat of this behavior. But in contrast to the 1990s, India has shown increasing willingness to allow its army to cross the border for one-off reprisal attacks to send a signal. While the goal is to ensure a contained conflict, this does open the possibility of wider conflagration. But against this, there have been indications of back-channel dialogue between the two sides.
So, the positive black-swan event could be a potential thawing in ties between India and Pakistan. Given that both sides opt to keep talks secret, in recent years, they have made breakthrough announcements (like ceasefires) without any warning. Perhaps a similar development could emerge this year.
Meanwhile, tensions with China will continue to simmer as India will likely expand its defense partnerships with countries like the U.S., France, Germany, UK, Australia and Japan, while continuing to buy more advanced weapons and fortifying its infrastructure along the Chinese border. Beijing views all of this as a threat. Despite repeated rounds of border talks, it’s not clear that either side will meaningfully pull back their troops, indicating that risks will remain elevated.
Pakistan: U.S. Withdrawal, Afghanistan Likely To Alter Course of Security, Foreign Policy and Economics
Pakistan Risk Events in 2022
- Fraying ties between the civilian government and army
- Foreign policy challenges and resulting rise in security challenges
- Persistent fiscal deficits and weak macroeconomic environment requiring external support
The Backstory
The U.S. pull-out from Afghanistan in August 2021 will likely have the largest impact on Pakistan (aside from Afghanistan itself of course), from a security, foreign policy and economic standpoint. Pakistan is largely seen as the invisible hand that supported the Taliban’s resurgence and its main patron. This stems from Pakistan’s military and intelligence service (ISI) having created the Taliban in the 1980s and 1990s, coupled with Islamabad’s policy of “strategic depth.” This looks to use Afghan territory as a re-staging base in the event of a future India-Pakistan war in which the former encroaches upon the latter’s land, coupled with using Afghanistan to support proxy groups that attack India.
However, neither Pakistan nor China have officially recognized the Taliban. This is despite expectations that they would so to give Beijing an opportunity to extract mineral resources from Afghanistan, while also having greater access to central Asia, the Indian Ocean and deepen its geopolitical reach and influence. This is likely due to challenges both are having with managing the Taliban. However, that’s not to say Pakistan and China are not potentially working with the Taliban. While they likely are, neither wants to officially “own” the Taliban.
Blowback from the West with respect to Pakistan’s ties with the Taliban and Beijing could accelerate following the U.S. withdrawal from Afghanistan, hence why we see it to be so consequential. For the past 20 years, the U.S. largely tolerated Pakistan’s support for regional militant groups – many of which were aimed at India – given Islamabad’s support for the U.S. war in Afghanistan. That is no longer a consideration. Plus, the U.S. and others are largely critical of Pakistan’s drift towards China.
Accordingly, previous aid money to Pakistan will likely halt entirely, which will erode Pakistan’s army to finance operations against domestic terror groups. That means either the security environment will worsen, or Pakistan will need to allocate even more funding for the army, which already stands at nearly 25% of the budget.
Our model-based sovereign score for Pakistan is quite weak, but our more nuanced “Fiscal/Macro strength” score is 7.0. This takes into account the country’s debt levels and whether fiscal spending is delivering growth. Given that most of Pakistan’s budget goes towards the security services, there is limited spending on growth, inducing sector. Plus, other indicators in our model exhibit weak scores for demographic harmony, treatment of minorities and other factors. When coupled with a weak economic backdrop, this can result in terrorism.
We anticipate persistently high fiscal deficits coupled with higher prospects for terrorism-related violence. Granted, China and Saudi Arabia may provide financial lifelines, as both have increasingly done in recent months and years. This will further alienate Pakistan from the West.
Macroeconomic performance will likely remain weak, with the economy growing at less than 4%. And all while FX reserves will remain relatively low, causing constant concerns about Pakistan’s ability to fund external liabilities. This again makes Chinese and Saudi financial support so critical alongside the ongoing IMF program.
On the domestic front, Prime Minister Imran Khan’s ties with the army could remain fractured. The army is suspected of having helped Khan win the 2019 election. However, ties deteriorated last year when Khan voiced his unhappiness with the army for selecting a new head of the ISI (intelligence) without his approval.
Per our model, the “Confidence in Governing Institutions” score for Pakistan is 7.0 – reflecting a “low level of faith and support amongst Pakistanis in institutions like the government and judiciary.” And more specifically, our “Support of Leadership” score is 8.5. Comparatively, over 90% of the population has confidence in the army. Accordingly, Khan will likely not create a war with the army because he knows he’ll lose. But ties could deteriorate, and the army may start to look for new leaders to support ahead of the 2023 national elections.
Thailand: Weakened Prime Minister Could Result in an Increase in Political Violence
Thailand Risk Events in 2022
- Anti-army violence potentially rising ahead of the elections, and thereafter
- Muted economic growth
- Wider than trend fiscal deficits and manageable inflation
The Backstory
Thailand’s politics appear to be evolving into an illiberal version of Japan, where one party is in power and thus “elections” are really about who leads that party. The erosion of Thailand’s democracy has been two decades in the making, but truly accelerated after the 2014 coup led by General Prayut Chan-o-cha.
In 2019, Prayut decided to transform Thailand back to a “democracy” by holding elections. However, the legislative branch was re-structured with the upper-house Senate consisting of 250 members, all of whom were selected by the army, and a lower-house with 500 seats. Both houses select a prime minister who needs the support of 376 votes.
Prayut ran in the 2019 election, and since the Senate was all appointed by the army, he only needed the support of 126 lower-house members to become prime minister, which he easily achieved.
Going forward, this structure nearly guarantees that a member of the army will always serve as prime minister, which is exactly what the King of Thailand wanted, too, as the monarchy and army support one another.
This means that politics has become an intra-party affair within the ruling party/army since no one else really has a chance of becoming prime minister. At the moment, Prayut is losing support of his fellow army colleagues as evidenced by the fact that members of his own party continue to request no-confidence votes against his administration.
Thailand is scheduled to hold elections in 2023, but the leadership could opt to advance voting to 2022.
Given Prayut’s potential decline in popularity, the only outcome is for a member of the army to replace him. However, for a country that has a history of anti-government protests, the series of no-confidence votes provides the electorate with ammunition to stir up additional protests, particularly given the very low level of support for the country’s leadership and governing institutions amongst the populous, which is typically a catalyst for violence.
Per our models, Thailand’s “Support of Leadership” score is extremely weak at 10.0, while “Confidence in Governing Institutions” is 9.5.
It’s hard to see the army dislodged from power given their dominance, but Prayut could potentially be removed and/or step down. Accordingly, the key risk to observe are strikes, riots and civil commotion as voters begin to speculate that the army is turning on Prayut. This could then lead to the potential risk of yet another coup if the army feels the situation is getting out of control. Alternatively, if elections are held and another army member becomes prime minister, discontent could continue.
Beyond that, relations with China are somewhat inconsequential given Thailand’s geography, immunizing it from external disturbances. Thus, on the political violence front, most of the risks stem from domestic protests.
On the economic front, like in the Philippines and Malaysia, debates over economic policy are largely settled and the country en-masse supports liberal economic policies. Given how open Thailand’s economy is currently, there’s not much scope for reforms. Even if there were, reforms are not controversial. Instead, the state of democracy and the rule of the army is contentious and the greatest source of risk.
With that said, tourism continues to remain low due to COVID-19. Thailand is offering quarantine-free travel, and even proposed creating bubbles for tourists in certain beach towns. However, the inflow of visitors could remain low, affecting both the economy and fiscal policy. In order to support economic growth, the government will likely keep fiscal deficits above trend. Historically they were 1% to 2% of GDP but are now double that figure. However, Thailand can absorb the spending given its low debt levels, so we are not concerned with its sovereign outlook.
Plus, dollar reserves are very, very high at almost $200 billion. Inflation is currently relatively low but could start to rise on account of rising import prices. On a recent historical basis, Thailand has not been prone to sustained periods of high inflation, which we expect to continue. This also means that interest rate increases may be somewhat muted too.
Malaysia: Stable Politics for the First Six Months, After Which Anything Could Happen
Malaysia Risk Events in 2022
- Rising fractionalization of politics
- Stable macroeconomic landscape and slight increase in interest rates
- Hedging of ties with major powers
The Backstory
Malaysia has had a bit of political turmoil over the past few years. Mahathir Mohamad, who served as prime minister in the 1980s and 1990s and helped Malaysia become an economic power in Asia during that era, came out of retirement to win the 2018 election following the 1MDB scandal, which had engulfed sitting Prime Minister Najib Razak.
However, by 2020, Mahathir resigned, giving way for Prime Minister Muhyiddin Yassin to take over. Yassin himself only held onto power for a short period as his government collapsed in 2021, upon which Ismail Sabir Yaakob became prime minister. All this transpired without general elections as the parties in parliament simply formed new alliances. Yaakob is expected to serve until at least July 2022 per an inter-party agreement. Members of parliament will support his tenure so he can pass the next budget. But after that, all bets are off, and elections could be advanced from the scheduled date of 2023.
The political environment should remain stable for the first half of the year until the budget is approved, after which inter-party ties may begin to fracture and could lead to early elections. As a result, ethnic issues could become more prominent as Malaysia approaches the next election. Malaysia is made up of Malay, Chinese and Indian communities, however Malays are the largest group with the most political influence. Historically, UNMO (the largest and most dominant party) received support from all three communities. But that’s starting to change as UNMO is seen as a Malay party, with some support from ethnic Indians. Chinese communities tend to back the opposition. UNMO is increasingly hinting that if the opposition parties come to power, then the country will be run by Chinese. This is exacerbated by the fact that most Malays are Muslim (as is Malaysia as a whole), whereas Chinese voters are not, thus invoking aspects of religion into the discussion too.
While ethnic issues can drive elections, we do not foresee them boiling to the level of threatening the nation’s political security. Our outlook remains that Malaysia presents low-level risk for strikes, riots and civil commotion. Despite the ethnic divides, our model-based scores indicate low-levels of risk for most drivers of violence given strong support for governing institutions (1.0), high levels of personal freedom (1.5), a generally harmonious demographic (4.5) and an economically strong urban environment (3.5).
Much of this stems from Malaysia’s stable economic performance, with GDP expected to expand by more than 5% in the coming years, while inflation is relatively subdued. Thus, some monetary tightening may be on the way, but the economic will likely perform well.
The risk of war is also limited as Malaysia does not have any meaningful territorial disputes. Plus, Malaysia-Chinese ties are increasingly improving following the renegotiation of the high-speed rail development contract with China, which resulted in lower expenses for the project. More so, Malaysia does not see China’s incursions in the region as a threat to its own security and benefits from close economic ties with Beijing, thus Kuala Lumpur avoids making controversial commentary on the subject of China’s advancements in the region. Separately, Malaysia’s ties with India should improve following Mahathir’s resignation (he openly criticized New Delhi’s Kashmir policies, which caused a deterioration in ties).
Philippines: National Elections Could Re-Set Foreign, Domestic Policies
Philippines Risk Events in 2022
- Shift in domestic security policies
- Worsening ties with China
- Stable economic outlook
The Backstory
President Rodrigo Duterte came to power in 2016 and is set to resign from office in the coming year. Along the way, he focused on domestic security and operated a draconian anti-drug campaign, which some accuse of engaging in extra judicial killing of gang members. In fact, his own Vice President Leni Robredo has opposed his policies (she belongs to a different party than Duterte as voters select president and vice president separately). Duterte also initially supported closer ties with China, at times over-looking Beijing’s advancements into, and claims over, the South China Sea. At one point, he threatened to kick U.S. troops out of the Philippines, which eroded inter-country ties.
The Philippines will hold elections in May for:
- Presidentes
- Vice president
- Senate
- Local offices
Per the country’s electoral structure, the president and vice president run separately and can represent different parties, which explains the tenuous ties between Duterte and Robredo. Robredo will likely seek the presidency, alongside:
- Ferdinand “Bongbong” Marcos Jr., son of the famous Marcos dynasty
- Isko Morena, Mayor of Manila
- Manny Pacquiao, former boxer
President Duterte’s daughter, Sara Duterte, was expected to run for president, but will instead seek the vice president’s office. Most of the Philippines is of the same ethnic and religious makeup, thus ethnic issues are not topical issues during elections. Instead, politics is driven by personalities with voters rallying around individuals, and not even political parties. With that context, the two most likely contenders at the moment are Marcos and Robredo, given their standing with the population and tenor in active politics/name recognition.
Given that neither Duterte nor his family member will be president, we can anticipate some curtailment to the country’s anti-drug campaign. This will likely not have any significant impact on the security environment but could alleviate any accusations against security forces. Foreign policy could witness a change as most candidates running for the presidency are weary of China’s intentions and support close ties with the U.S.
Marcos Jr. recently indicated that as president, he will negotiate territorial disputes directly with China, implying the U.S. would not be involved and that the country should stay out. However, he also indicated that he would strengthen ties with the U.S. and Russia, which is an interesting development.
In general, as China begins to further its inroads in the South China Sea, which directly undermine Philippines’ security and economy, we anticipate the next president to adopt a harsher line against Beijing and foster a closer relationship with the U.S., or at least closer than what we have seen with the outgoing president.
The economy will likely regain strength and grow above 6% in the coming years. However, fiscal deficits may remain wide at nearly 8% of GDP. Yet, debt-to-GDP levels remain relatively low, while Philippines has very high FX reserves, which should blunt any concerns about the country’s abilities to service its external liabilities. Meanwhile, the Philippines has a history of being open and supportive of inbound investments and liberal economic policies, which we anticipate will continue helping ensure an inflow of investments and capital.
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