FACTBOX-Key political risks to watch in Asia in 2011

21 Dec 2010

Source: reuters // Reuters


d problems, most pressingly the burden of huge public debt twice the size of the $5 trillion economy. The ruling Democratic Party of Japan (DPJ) has for months been firefighting rather than taking the tough steps economists say are needed to boost growth. A key test will be passing the budget for the fiscal year 2011/2012, which starts in April.

-- Snap election in Japan. If the government, which has already had to reach out to a smaller party in order to get laws through parliament, finds deadlock so great that it cannot pass the budget, Kan may feel compelled to call a snap election. In any case, voters will get the chance to express discontent with the DPJ in April municipal elections. Even if the party performs worse than expected, Kan is unlikely to resign, not least because there are few if any obvious replacements, and yet another new leader -- Kan is the country's fifth since 2006 -- would not solve its problems. [ID:nTOE6BF01L]

-- Can Japan enact economic reforms? Experts say raising the 5 percent sales tax is key -- a radical idea in a country where the tax has not been increased for years, but one the DPJ has openly broached.(To bring up (a subject) for discussion or debate.
) Still, with his popularity low and parliamentary power sapped, Kan is unlikely to try to force the issue. In December, the government ordered a 5 percentage point cut in the corporate tax rate starting from April 2011, but analysts doubt the move will boost either Japanese corporate spending or the popularity of the DPJ. [ID:nTOE6BF00L]

-- Australia's mining tax. The government's centrepiece policy is a proposed new tax regime for the resources firms that have long been the backbone of the Australian economy. After taking office in August, Gillard made a deal with miners Rio Tinto , BHP Billiton and Xstrata to cut the headline rate of the new tax to 30 percent from 40 percent, but the matter is far from settled. Final details of the tax are under discussion between the government and mining firms. Smaller miners are unhappy with the plan, and a dispute over royalty payments could scuttle the deal. The government is expected to present the tax law to parliament in May, and it will be voted upon after June, when it will depend on Green support in both houses of parliament. [ID:nSGE6AL03M]

-- Resistance to Singapore's $7.9 billion takeover bid for the Australian bourse (ASX), a deal which cannot go through without Australian political backing. No single owner is allowed to hold more than 15 percent of ASX, a rule which would have to be lifted by parliament. Indications are that the independents and Greens oppose the takeover, and may block it. If the buyout does go ahead, firms will be concerned that it may mean changes to listing rules and higher compliance costs. [ID:nL3E6NE1YB]


WILL SOUTHEAST ASIA'S SURGING MARKETS RUN OUT OF STEAM?

Southeast Asia's financial markets were among the world's best performers in 2010. Indonesia led the pack on growing expectations that it will be awarded an investment grade sovereign rating, but the Philippines and Malaysia also posted impressive gains, and even Thailand staged spectacular stock market and currency rallies despite the worst political violence in its modern history in April and May.

The risk is that these gains unravel in 2011 and that the plug is pulled on the flood of hot money that has buoyed the region's markets. Monetary authorities will probably have to play catch up with other Asian central banks that are further into a tightening cycle, food prices could easily get out of hand, foreign participation in the region's markets is already relatively high and rising U.S. Treasury yields could pull money out of places like Indonesia and the Philippines.

Foreign investors have largely turned a blind eye to Southeast Asian political risk in their hunt for high-yield assets. If enthusiasm begins to wane, a more glass-half-empty view of regional politics could spark a significant reversal.

What to watch:

-- The biggest political risks are in Thailand, where an intractable political conflict remains far from resolution. New general elections must be held by the end of 2011, and given the country's divisions there is a significant risk of unrest during campaigning. If the Puea Thai party backed by fugitive former Prime Minister Thaksin Shinawatra wins enough electoral support to form a government, a coup or judicial intervention to overturn the result is almost inevitable -- Thailand's elites remain bitterly opposed to Thaksin and terrified of political reprisals if a party loyal to him wins power. If the Democrat Party of the current prime minister, Abhisit Vejjajiva, manages to win enough seats to form another coalition, the "red shirt" movement demanding change may resort once more to mass street protests. The risks are heightened by the poor health of 83-year-old King Bhumibol Adulyadej. Secret U.S. embassy cables released by WikiLeaks have underlined concerns the succession to Crown Prince Maha Vajiralongkorn will be a tense time with high potential for unrest and upheaval. [ID:nSGE6BG01R]

-- In Indonesia, President Susilo Bambang Yudhoyono has disappointed many with his failure to decisively promote economic reforms and crack down firmly on corruption. For now, investors see Indonesia's bullish domestic growth story as too good to miss despite the political risk. But a change in sentiment could hit Jakarta markets hard. [ID:nL3E6NG09T]

-- In Malaysia, the opposition is losing ground and that may embolden Prime Minister Najib Razak to hold early elections in 2011. But a verdict in the sodomy trial of opposition leader Anwar Ibrahim may widen divisions. [ID:nSGE6AE0TW]

-- Early optimism sparked by the election of Philippine President Benigno Aquino is fading. He has yet to show he can challenge entrenched vested interests and crack down on corruption to tackle the fiscal deficit. [ID:nSGE6AF0GD] (Editing by John Chalmers)