Across much of Asia, 2013 proved unexpectedly testing. Demand from the US and the EU remained sluggish, while the threat of an end to the asset-purchasing programme of the Federal Reserve (the US central bank) sent many Asian currencies tumbling and heightened investors’ concerns. There are good reasons to be hopeful about 2014, however. It should be a big year for economic reform, with progress made in international trade and in China. Several nations go to the ballot box and look set to replace clapped-out governments with more energetic administrations. But there are also grave risks to several of the region’s less secure areas.
Voters in three of the world’s biggest democracies will cast their ballots in the next six months. India is likely to see its most partisan election in decades. The ruling Indian National Congress has had a poor term and is under pressure from the main opposition Bharatiya Janata Party (BJP). The BJP’s prime ministerial candidate, Narendra Modi, is a divisive figure nationally, tainted by bloody Hindu-Muslim riots that broke out on his watch in 2002, which left over 1,000 people dead. Nevertheless, he is popular in the business community and has enjoyed great success as chief minister of Gujarat. The power of state-based parties means that a coalition government is all but guaranteed. Should the BJP emerge as the largest party, securing the support of smaller entities will be a challenge for Mr Modi, as he remains reviled in Muslim communities.
A coalition administration will also be formed in Indonesia following a parliamentary election in April. The largest component is likely to be that from the current main opposition Indonesian Democratic Party–Struggle (PDI-P), whose stock has risen purely by avoiding the corruption scandals that have tainted its rivals. The subsequent presidential election hinges on if and when the PDI-P leader, a former president, Megawati Sukarnoputri, stands aside for the hugely popular and unorthodox Joko Widodo, the mayor of the capital, Jakarta. Given his clean reputation and refusal to kowtow to interest groups, a Widodo-led government is the brightest prospect for Indonesia in an otherwise dismal field.
Bangladesh will attempt to elect a new government in January, but should the main opposition Bangladesh Nationalist Party (BNP) choose to boycott—as now looks inevitable—another poll later in 2014 is possible. The one certainty is that the interminable rivalry between the BNP’s leader, Khaleda Zia, and the prime minister, Sheikh Hasina Wajed, will continue. A significant election will also be held in Fiji, where the prime minister and orchestrator of the 2006 coup, Voreqe “Frank” Bainimarama, has kept citizens waiting to vote for five years. A new constitution and voting procedures ought to make the country more democratic. We are dubious about Commodore Bainimarama’s commitment to plurality, however, especially if it points to his removal from power. Elsewhere in the Pacific, New Caledonia may call a referendum on independence from France. The poll can be called at any time between 2014 and 2018.
Powder kegs and tinderboxes
Security risk in several Asian countries worsened in the final months of 2013, and we expect little improvement in 2014. Anti-government protests returned to the streets of the Thai capital, Bangkok, which led the prime minister, Yingluck Shinawatra, to call an early election for February. Of greatest concern is the fact that the demonstrators, linked to the opposition Democrat Party, are showing little interest in the outcome. The protest leader, Suthep Thaugsuban, has called for the government to be overthrown and replaced by an unelected “people’s council”. This retrograde step has yet to capture the imagination of the army or the royal family, but suggests that the election will not resolve Thailand’s future, whatever the outcome. The threat to stability posed by the eventual passing of Thailand’s elderly king also looms large. Equally as unpredictable is the course for North Korea. Kim Jong-un’s decision to execute his uncle, Jang Song-thaek, showed that the youngest Kim does not lack for confidence. We expect high-level defections, hitherto rare, to increase. Political instability at home often prompts more provocative behaviour abroad, which could bode ill for South Korea. Jang Song-thaek’s link to China could also fray bilateral ties with the North’s most important benefactor.
The wave of optimism that has accompanied political reforms in Myanmar will break in 2014 as the country’s sectarian conflicts continue to claim lives. The central government’s control over many ethnic-minority areas will remain tenuous, and there is every chance of one or more of the fragile peace treaties collapsing. Extending citizenship to the stateless Rohingya refugees living in western Myanmar would be a positive step, but the prospects of this happening are distant. We have greater confidence that the talks between the Philippine government and the Moro Islamic Liberation Front on the island of Mindanao will result in lasting peace, but challenges to the constitutionality of a new basic law for the region could see the pace of progress slow in 2014.
Building bridges—and walls
The withdrawal of NATO troops from Afghanistan in 2014 will be significant both inside and outside the country’s borders. We believe that fragmentation of the state remains likely, as lasting peace would require the co-operation of the Afghan administration, insurgent groups and regional governments, as well as international forces. The troop withdrawal means that the US security and diplomatic presence in Asia can be refocused elsewhere; co-operation with Vietnam, Thailand and the Philippines is likely to rise as the US attempts to form a bulwark against China. Asia’s largest economy will also remain outside of ongoing talks on the Trans-Pacific Partnership, a free-trade initiative that will continue to inch towards completion. Political partisanship in the US will entail further delays, which could allow the Japanese prime minister, Shinzo Abe, more time to force painful structural reform upon his country’s cosseted agricultural sector. Support for the agreement remains strong among governments in Australia, New Zealand, Malaysia and Singapore.Taiwan‘s participation depends largely on Chinese goodwill.
An acknowledgement of the hubris that underpinned much of the economic policy made in Asia since the global economic crisis should result in a steadier platform being laid in 2014 for future economic growth. At a plenary meeting in late 2013, the Chinese Communist Party leadership reaffirmed its commitment to liberalising the exchange rate, interest rates and the capital account. Although the plenum suggested that the government has no intention of subjecting the state-owned sector to a privatisation drive similar to the 1990s, indirect reforms, such as moves towards the market pricing of inputs, will place state-owned enterprises under pressure to raise productivity. Local governments’ debt will again come into focus as the central government publicises details of its first audit into their finances since 2010. Greater allocations from the centre to welfare services and a modest boost to revenue-raising powers could be introduced to ease the burden on local administrations. The plenum also outlined a series of eye-catching social reforms, including a relaxation of the one-child policy. If reforms are implemented swiftly and in full, they could boost productivity and lift GDP growth above our current forecasts, but this will require fearlessness in the face of powerful vested interests.
Money moving west
Governments in many Asian countries, but particularly in India and Indonesia, meddled in markets in 2012-13, leading to a variety of distortions, from state-directed lending to capital controls, trade protectionism and import substitution. India has been quicker than Indonesia to renew its commitments to a more liberal reform agenda, but a region-wide move towards greater market openness will not be quick, and investors will need convincing. Growth in emerging markets across the world in 2014 risks being tempered by capital outflows to rich countries, largely because of a shift in the policy of the Fed, which has announced that it will begin the long process of normalising monetary policy in January.
The movement of capital away from riskier assets in Asia to Europe and the US will diminish the prospect of asset bubbles emerging in the region, but there will be areas that merit concern. We are forecasting a slump in property prices in Hong Kong in 2015, but the downturn could begin at any time, despite interventions from the authorities in 2013 to cool the market. Fast growth in property prices is also emerging once again as a risk in Australia (although this is countered by a dramatic increase in the saving rate since the global financial crisis), New Zealand, Singapore and particularly Malaysia, where household debt has risen alarmingly.