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Asia eyes economic gain not political risk

TOKYO: Politics seems to be taking a back seat to economics in Asia as investors take heart from the region's robust recovery and a growing conviction global trends make the broad thrust of policy reforms irreversible.

A recognition Asia's economies were now in much stronger shape than before the 1997 financial crisis was making them better able to withstand both external economic shocks and domestic political surprises, economists said on Tuesday.

"One can always identify political risks, but the fact is that politics is receding as a driver of equity valuations," said Manu Bhaskaran, group research director at Societe Generale Securities in Singapore.

As if to make Bhaskaran's point, Taiwanese stocks jumped 5.49 percent on Tuesday in a relief rally after President-elect Chen Shu-bian, victor in Saturday's election, proposed a peace summit with Beijing to ease cross-Strait tensions.

Taipei shares had lost nearly 10 percent since March 13 on worries a win for Chen, whose party advocates independence, would inflame relations with China, which regards Taiwan as a renegade province.

Tim Condon, Hong Kong-based chief economist at ING Barings for non-Japan Asia, said he believed the risk premium for the region has gone up with Chen's victory.

But he said investors were by and large comfortable with the degree of political risk in Asia.

"As people are fairly sanguine about the outlook on the political front in most of the economies of the region, that's allowed the strong economic fundamentals to really be seen in high relief. That's what's attracting the money," Condon said.

KOREA TEST

The next test of the markets' appetite for political risk is scheduled for April 13, when Korea holds parliamentary elections.

The poll does not have the same make-or-break character as Taiwan's election, which ended more than 50 years of Nationalist rule.

This is because the main power resides with President Kim Dae-jung, who hopes the vote will be a referendum on the sweeping reforms his centre-left government has pushed through since 1997, when it became the first opposition group to win power in Korea.

Still, Rob Subbaraman, who tracks non-Japan Asia for Lehman Brothers in Tokyo, said the election could put a brake on the pace of reform if it made it harder for Kim's Millennium Democratic Party, which holds only a third of the seats in parliament, to assemble a new coalition.

"The Korean economy has been rewarded by a lot of foreign investment flowing into the country, and the risk is that that could slow," he said.

"You could start to see foreigners becoming concerned that progress was going to slow, so I think these elections could turn out to be more important than people think."

Sun Bae Kim, head of Asian economic research at Goldman Sachs in Hong Kong, agreed the outcome of the election was uncertain but said the overall thrust of Korea's economic and structural policies was likely to remain unchanged.

"Even if domestically there was some reticence toward further reform or even a temptation to backpedal, it's going to be much more difficult," Kim said. "It's hard to put the genie back in the bottle once it's been let out."

INTERNET REVOLUTION

Kim singled out the "remarkable" impact of the Internet. High-tech start-ups, for example, that would have found it hard to obtain financing before the crisis because savings were channeled primarily to Korea's chaebols, or conglomerates, had been able to fund their growth in the booming equity markets.

Bhaskaran at SG Securities made a similar point.

By spawning start-ups and management buyouts, the Internet was eroding the established economic order. By enabling a 500,000-strong grassroots political movement in Korea to campaign against politicians deemed corrupt or inept, the Internet would also have a profound political impact, Bhaskaran said.

"The Internet is changing mindsets," he said. "It shows that political reform, the desire for change, is very much alive and kicking."

And that democratic vibrancy, although it may generate more uncertainty than in the olden days of authoritarian rule in Asia, is something that investors should welcome if they want to buy into long-term growth, according to Kim at Goldman Sachs.

"The forceful emergence of democratisation that we've seen both in Taiwan and Korea is testimony to the fact that, beyond a certain point, economic development on a sustainable basis will require quite a bit of liberalisation," Kim said. -Reuters