Politics to affect policymakers

Politics to affect policymakers

By Suresh Kumar and Deepa Balji

SINGAPORE (JP): When the economy is down, it will not just be
stock market bargain hunters who will be searching for
opportunities. Politicians in the ruling coalition know that the
opposition will exploit the situation to their benefit.

To prevent this, governments may be forced to factor in
populist sentiments as they craft their policies. As the year
unfolds, Philippines and Indonesia are likely to be worst hit
given their political situation. Singapore and Malaysia will
appear to be the stark contrast but they will not be spared.

In the Philippines President Glorio Arroyo Macapagal will be
haunted again by the man she deposed in Jan 2001 as Joseph
Estrada is likely to tell electorate that the economy is
suffering because he is no longer around. It is also believed
that only 11 out of 24 members of the senate are behind Arroyo
while former president Estrada has about 10 on his side.

The most likely victim will be the budget as the struggle to
meet the PHP 148 billion deficit will have to be relaxed. It will
be hard for Arroyo to tell people to pay up taxes or collect more
from corporates when the economy is in doldrums.

The government has indicated that monetary policy will stay
neutral. But powerful business groups are likely to lobby for a
weak peso and lower rates. This will intensify as global growth
nears it is expected to bottom towards the later part of this
year. If the administration succumbs to such pressures, there
will be renewed inflation risk.

Unlike other Asian countries, the Indonesian economy is likely
to be the most resilient to the global downturn. But even the
marginal decline in growth would be ammunition for the impatient
and frustrated elements of society who are satiated with
seemingly ineffective leaders since Soeharto left.

Though Vice President Megawati Soekarnoputri (assuming she is
president in August) is the most popular leader in Indonesia, she
occupies only 25 percent of seats in the legislature. The
historical burden of weak leadership and this power base is
likely to pressure her fiscal and monetary deliberations.

To meet these pressures from the political and economic front,
the new regime may consider cutting back on funds allocated to
regions (autonomy subsidy) to cope with pressures on the budget
deficit. Further tax hikes is unlikely to be the prime objective
of a new government. On monetary policy, there could be pressure
to finally end the ever rising Bank Indonesia Certificate
interest rate. This short-term gain will risk subsequent
inflation and currency pressure.

In contrast to the Philippines and Indonesia, both Malaysia
and Singapore seem to be in a better state. But are they really
immune?

In Singapore, talk of political pressure is on the government
(which commands 80 seats in the 83-seat in parliament) which
would have been typically dismissed. However with elections
widely rumored to be called as early as by the end of the year, a
contracting economy which may last longer than expected could
weigh on the vote cast in the ballot box.

The People's Action Party has been credited with successfully
guiding Singapore out of the Asian crisis relatively unscathed
but there are pockets of society who have suffered because of
retrenchments.

Though benign inflation has been cited as a reason for the
recent shift in exchange rate bias to neutral from tight, one
cannot rule out the government's desire to appear sympathetic in
hard times.

Though market is divided on the need for a supplementary
budget as this is a cyclical slowdown unlike the structural
crisis that crippled the region in 1997-1998, the government said
new measures can be expected at the end of July.

It is likely that an off budget measure will be seen this year
worth about S$1 billion. Although this will be less than the
S$2.6 billion in 1998, these measures are there to provide some
relief, not recovery.

Basically, the new measures will be for the man in the street
especially as we move closer and closer to the election date.
The other question now debated in market will be, what happens to
the Central Provident Fund -- the mandatory savings that the
population has?

We doubt very much that the government will further reduce the
employer contribution by 200 basis points as suggested by some observes
recently. It would be too painful and way too soon after the
previous easing in 1999.

What about Malaysia? History shows that two of the most severe
challenges to Prime Minister Mahathir Mohammad came when the
economy contracted sharply; from the time of Tengku Razaleigh in
the mid 1980s and Anwar Ibrahim during the Asian currency crisis.
Though the ruling coalition occupies slightly over two-thirds of
the seats in parliament, there are signs of a slowing economy
with challenges to leadership coming from opposition Parti Islam
Se-Malaysia which is trying to exploit a divided Malay
electorate.

There has been talk of Malaysia re-aligning the peg to placate
manufacturers. However it seems clear that the grandmaster of
Malaysian politics is going to keep the rate steady for a very
long time. The veteran leader has a tremendous sum of his own
political capital invested in sustaining the peg, which has
become the most high profile symbol of his determination to chart
course that differs from the prevailing economic orthodoxy.

But surely he will relent on the fiscal front. Elections in
Malaysia are not due until 2004 but from now till then, Mahathir
will give grants in the form of utilities to boost private
consumption and create projects to create employment.

Suresh Kumar is Emerging Asia Markets Analyst with Standard and
Poor's MMS International. Deepa Balji is correspondent with
Bridge Newswire. Both of them are based in Singapore.