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Asia may be underpricing political risk

TOKYO: Pre-election jitters may be unsettling shares in Taiwan but financial markets are displaying a detachment bordering on complacency about political risks elsewhere in Asia.

Political analysts said the region's brisk economic recovery from its 1997-98 financial crisis was cloaking chequered progress on a host of broad political issues that could come back to haunt investors in the event of a fresh downturn.

"What's at issue is whether some of the underlying structural causes which gave rise to the economic crisis -- some of the problems of governance and transparency -- have been effectively repaired," said Michael Leifer, professor of international relations at the London School of Economics.

As well as heightened tension between China and Taiwan, markets should be alert to the consequences of poor leadership in the Philippines and the process of managing political succession in Malaysia, where Prime Minister Mahathir Mohamad, 74, has been in power for 20 years, Leifer said.

In South Korea, next month's general election will have an important bearing on the country's economic reform drive.

But the country giving analysts most concern is Indonesia, which has been wracked by religious and separatist violence and a power struggle between President Abdurrahman Wahid and the armed forces.

Wahid has made a series of deft moves during his five months in office that analysts say have sapped the military's threat to his power. But the president acknowledged on Tuesday that some senior military officers were still lining up to oppose him.

"Whatever the degree of success of Wahid with the military, he's still a man who has had two strokes and is virtually blind in charge of a rather difficult coalition cabinet," Leifer said.

MUDDLING THROUGH

Alan Dupont, a fellow at the Strategic and Defence Studies Centre of the Australian National University (ANU), said markets had become accustomed to political turbulence in Indonesia.

Even so, he said serious questions remained as to whether Wahid had the political skills and physical health to hold Indonesia together if separatist rebels in Aceh stepped up their demands for independence.

"Indonesia is more likely than not to muddle through and stay together as a unitary state. But the prospects of its descending into further political turmoil and even into semi-anarchy have increased significantly over the last 12 months," Dupont said.

"You'd have to be still a little bit pessimistic about the capacity of Wahid to navigate the country through these next few years without major political unrest," he said.

The worries are shared by Singapore Prime Minister Goh Chok Tong, who said in an interview published on Monday that the city state had reasons to be apprehensive about its close neighbour.

"If the economy doesn't turn round within a year, then you must expect political and social discontent to ignite in Indonesia," Goh told the Financial Times.

LOW POLITICAL RISK PREMIUM

Given all the potential problems, why aren't financial markets more anxious?

"Generally there's not that great deal of alarm at the political trends we're seeing," said Desmond Supple, an economist with Barclays Capital in Singapore. "There's not a great deal of political risk premium which is priced in here at the moment."

Graham Neilson, an Asia analyst in London with BNP Paribas, said longer-term political considerations traditionally take a back seat in the region to economics and market dynamics.

"That's not the Asian way. I'm sure there are innumerable risks to Hong Kong over the next five to 10 years, but investors don't really give two monkeys when the market's going up and there's a lot of excitement around," Neilson said.

"I realise there a number of risks in terms of politics in Asia and there perhaps is a degree of complacency, but I don't think the complacency is anything new," he added.

Neilson said he was confident that Saturday's presidential election in Taiwan would make no difference to the substance of ties with China, even though investors dumped stocks on Monday on worries that a win for Chen Shui-bian of the pro-independence Democratic Progressive Party would inflame cross-straits tension.

But Dupont, the Austalian analyst, said he was concerned by the recent sabre-rattling from the Beijing government.

"I'm not suggesting that military action by China over Taiwan is imminent. But I'm fearful that the Chinese are pushing themselves into a corner and will have no choice but to take some action because they've reduced their room for negotiation and flexibility," he said. -Reuters