Limelight on Political Changes, Risks in Major Asian Economies in 2012

The Asian political canvas looks challenging in 2012, with government changes in key countries likely to surprise investors and businesses.

The highlights are a once-in-a-decade leadership change in China, chances of an early general election in India, worsening uncertainty in Pakistani politics and general elections in South Korea, Taiwan and Malaysia.

CHINA

China will hold its 18th National Congress of the Chinese Communist Party (CCP) in 2012. The current crop of elite leaders like President Hu Jintao, Premier Wen Jiabao and Chairman of the National People's Congress Wu Bangguo are all expected to retire this year.
The Chinese Party Congress this year coincides with the U.S. presidential elections, and there will be heightened rhetoric on trade, currency and human rights from both sides.

The U.S. and China both face potentially important political transitions in 2012. American elections often see a round of China-bashing, while previous Chinese transfers of power have been characterized by prickliness and even more secretiveness than usual, the Heritage Foundation said in a panel discussion in its Web site. The fact that the two events are occurring simultaneously, for the first time in 20 years, raises the possibility of ugly misunderstandings, perhaps even conflict, it said.

Think tank Hoover Institution has said there is an element of insecurity over the leadership change in China. The general sense of uncertainty surrounding this upcoming leadership turnover, and the profound effect it might have on the CCP's factional dynamics, make it likely that 2012 will mark an especially interesting year in Chinese elite politics, it says.

The think tank says that within the 25-member Politburo, at least 14 leaders will vacate their seats to make way for younger candidates. Consequently, the principal figures responsible for the country's political and ideological affairs, economic and financial administration, foreign policy, and military operations will consist of newcomers after 2012.

INDIA

There are no scheduled national elections in India this year, but political observers are not ruling out a mid-term election given the precarious position of the ruling coalition when it comes to policy decisions, especially those related to foreign investment.
Elections in five states, especially in Uttar Pradesh (UP), which is the biggest state with a population of 200 million, will offer a clue to the emerging political scenario in the country.

While the timing of these elections has contributed to the ruling coalition's difficulty in pushing through unpopular reforms, the government may not still be able to do anything concrete even after elections are concluded, according to Capital Economics.

Prime Minister Manmohan Singh has suggested that liberalization of foreign investment in the retail sector may take place after the UP and Punjab elections are concluded, but this may prove to be wishful thinking. On the contrary, we think the coalition may fail to push through any significant reforms, Gareth Leather of Capital Economics says.

A Reuters Factbox says the political situation in India is not helping the investor confidence, which is already hit badly by the gloomy economic news. The report points out that the rifts in the government coalition make it hard to pass legislation to increase foreign investment in the economy.

A mid-term election and the emergence of a government with clearer mandate can change the situation. And the results of the State elections, especially in UP, hold a clue to whether a mid-term poll will take place.

There is a 60 percent chance of a general election being announced if the Congress does well in Uttar Pradesh. This could happen somewhere in October 2012. Without an election, UPA-2 cannot continue to govern - due to internal contradictions and worsening economic situation, political analyst R. Jagannathan wrote in First Post.

PAKISTAN

Pakistan's parliamentary elections do not have to take place until February 2013, but they are likely to occur this year, predicts Capital Economics.

Elections in Pakistan are usually periods of heightened uncertainty and are typically associated with increased political violence, writes Gareth Leather.

What worsened the political uncertainty in Pakistan was the health condition of President Asif Ali Zardari and his mysterious trip to Dubai to get treatment, which triggered rumors about his stepping down.

Leather points out elections in Pakistan normally see a surge in populist measures. The analyst says the ruling Pakistan People's Party will shy away from making any difficult policy choices this year, which means there is little chance of any progress being made on plugging the fiscal deficit through new taxes or cuts to wasteful energy subsidies.

Reuters adds: The domestic political instability and the tense relations with Washington, especially since the killing of Osama bin Laden by U.S. special forces in May, make the overall environment extremely hostile to foreign investors.

Zardari's government is weak, prone to splits, has limited control over the military and has failed to tackle corruption or reform the economy. Serious problems formulating and implementing policy will continue to deter investment.

TAIWAN, SOUTH KOREA, MALAYSIA

Taiwan elections will take place on January 14 and Capital Economics says that president Ma Ying-jeou of the KMT has a small lead over his rival, Tsai Ing-wen of the DPP.

The key issues in the campaign have been domestic, but there are no big differences between the two sides on economic policy. Both have pledged to rein in property prices and do more to create jobs and boost incomes.

In Malaysia elections can take place this year, though scheduled elections are in the next year. However, the lack of political alternatives means there is little uncertainty in terms of economic policymaking, says Capital Economics.

In South Korea, parliamentary and presidential elections will take place towards the end of the year. Like in Taiwan, election results will have little impact on economic policy making but the new administration will have to grapple with the troublesome North. According to Leather, President Lee Myung-bak's successor will more likely than not change his policy towards the North.

The recent death of Kim Jong-il increases the likelihood of the next president seeking to improve political and economic relations between the two Koreas.