Voters in some of Southeast Asia's biggest economies will go to the polls in crunch general elections next year – and the choices they make could lead to radical changes in diplomatic and economic policies that will affect investment appetite in the region for years to come.
Malaysia will kick off the political reshuffle; it is required by its constitution to hold a general election by August 24. Thailand will follow with its latest attempt to restore democracy in a November poll. Indonesia will start the campaign period for its general election on October 13, although the new president will only take office a year later.
Political leadership changes and their impact on the global economy are something money managers can not risk ignoring over the past twelve months.
US President Donald Trump has continued to catch the spotlight globally since he secured the White House in November 2016, with his populist economic policy of high tariffs and low corporate taxes potentially overturning the global investment landscape.
In China, the conclusion of the 19th Communist Party Congress in October underlined to global investors that they will need to get used to a China led by an increasingly powerful President Xi Jinping.
The attention is now shifting towards the south.
Malaysia
Malaysians are looking forward to the forthcoming election because they have never had higher hopes of establishing a truly new government.
The country has been ruled by a single coalition – the United Malays National Organization (Umno) – since its independence from British rule in 1957. But with incumbent Prime Minister Najib Razak embroiled in the multi-billion-dollar 1MDB corruption scandal, opposition parties are calling it the best opportunity to take control of a country that has fallen out of favour with foreign investors under his leadership.
Many economists have pointed out that the Malaysian economy has gone past its worst times, with gross domestic product growth expected to pick up from 4.5% last year to 5.2% this year. However, the negative perception resulting from political instability is a big overhang on foreign investment. This is borne out by Malaysian stocks’ modest 4.8% gain this year – the worst performing stock market among all major Asian economies.
Malaysia's first change of government – if it happens – bring the prospect of change to economic policies Malaysia has stuck to over the years. One change that is widely seen as having the potential to boost Malaysia's economic growth is to abandon its “big government” approach and support the private sector.
The government’s approach of maintaining strong control in various industries – mainly through state investment funds such as Khazanah Nasional, Employees Provident Fund and 1MDB – has been criticised as slowing private investment and deterring foreign capital inflows.
Some Malaysians hope the potential new government can support non-energy industries in a bid to reduce the reliance on the energy sector. Bank Negara, the country’s central bank, could also apply its abundant foreign reserves to help reduce the huge external debt in the local banking system, a move that would strengthen the Malaysian ringgit, which has been on a prolonged streak of losses since 2013.
Yet all these are built upon Najib falling from power and the odds still favour Umno, which has a strong network and historical dominance in Malaysia politics. It is helped by an electoral system that strongly favours Umno and allowed it to form a government despite receiving a lower share of the vote than the opposition in 2013.
Thailand
Thailand’s military junta has promised to hold a general election in November, an event that will see the country restore democracy and return to civilian rule after the 2014 military coup – the 12th such military takeover since the country's transition to democracy in 1932.
However, there is no guarantee the election will take place as scheduled, as the junta has repeatedly postponed a vote since 2016. A general election scheduled for November this year was delayed due to the death of Thailand’s long-serving King Bhumibol Adulyadej last year, while an election previously planned for 2016 was postponed to allow more time to draft the new constitution.
Prime Minister Prayut Chan-o-cha (pictured) said in October the election could be further postponed to 2019 depending on the progress of proposed new laws.
In any case, the election, whenever it comes, will be an important step as it puts Thailand back on track to implement social and economic policies, a process partly suspended as the country focused on political developments after the 2014 coup.
While Thailand is set to form a weaker government with the military's rising influence, the country will likely free itself from the influence of former Prime Minister Thaksin Shinawatra and his Pheu Thai party, which has largely dominated Thai politics since 2001.
For global investors, the focus will likely be whether the new government will further open its door to foreign investors. Foreign direct investment into Thailand has been on the decline since the coup, although many investors are still interested in having Thai exposure due to its steady economic growth.
As it stands, it remains to be seen whether the new government will change its protective stance against active foreign investors. A 49% foreign shareholding cap and the mandatory inclusion of Thai nationals on boards of directors are examples of rules that dampen active foreign ownership of Thai companies.
Meanwhile, the new government’s diplomatic relations with neighbouring countries will also be in the spotlight. The country is at the heart of Southeast Asia’s infrastructure boom as the region hopes to invest billions into the sector to enhance connectivity and drive economic growth.
Japan has historically been a big investor in Thailand, but China has been fostering stronger ties and exerting greater influence in recent years through a number of mega transactions like China Mobile's investment in Thai mobile carrier True Corporation. Thailand's Charoen Pokphand Group has also invested in China's Ping An Insurance and Citic Group.
Indonesia
When Joko Widodo (pictured) was elected Indonesia’s president in 2014, foreign investors had high hopes for his vision to develop and upgrade the country’s infrastructure, a move intended to strengthen connectivity across the archipelago nation to support overall economic development.
Three years on, most of his pledges have ended in disappointment. Jokowi's government is struggling to put in place the massive infrastructure budget it has promised at a time when the economy continues to grow below expectations.
Many industry observers suggest the new government, which will be elected late next year and come into power by late 2019, will have to fine-tune the country’s infrastructure-related policies in order to achieve success.
Similar to Malaysia, Indonesia’s infrastructure push has done little to help the private sector since government-backed companies are still dominating the construction and energy space.
Finance minister Sri Mulyani Indrawati has openly questioned whether state-owned companies are “actually investing in infrastructure”, raising concerns large infrastructure projects are turning into opportunities for corruption and money laundering.
In addition, Indonesia’s neutral diplomatic policy and its weak bargaining power among the international community has seen it embroiled in diplomatic struggles between bigger countries.
In a surprising move in 2015, Indonesia awarded a multibillion-dollar railway project to China over Japan despite the latter’s clear technical advantage, sparking rivalry between the two countries that both want to grab a slice in Southeast Asia’s infrastructure push. There are potentially more rivalries between the two superpowers as Indonesia unveils more infrastrcuture projects in the years ahead.
Since a big part of Indonesia’s infrastructure spending has to be financed by foreign countries, it remains to be seen whether the new government can establish clearer diplomatic directions in order to avoid confrontations to support its infrastructure initiatives.
