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.