Days of Rage in Streets Start Derailing Asia: William Pesek

Commentary by William Pesek

Aug. 28 (Bloomberg) -- Asia has indeed decoupled -- not from the U.S. economy, but from political reality.

Thailand is Exhibit A. Three years ago, it was the post- Asian-crisis role model. Living standards were rising, investors were funneling in and Asian peers were envious of ``Thaksinomics.''

The reference here is to the dual-track plan to boost domestic demand and export growth championed by Thaksin Shinawatra. The former Thai prime minister was removed in a September 2006 coup amid corruption allegations. Thaksin fled to the U.K. and bought soccer team Manchester City.

Yet the military leaders who replaced him were painfully inept. That paved the way for the People Power Party to be elected in December 2007. Its pro-Thaksin leader, former television chef Samak Sundaravej, is facing massive protests and calls for his resignation.

And just like that, one of Southeast Asia's shining examples of stability, prosperity and democracy is descending into farce. The joke among investors is which English Premier League team will Samak buy if he flees Thailand?

It's less of a joking matter that strategists like Dwyfor Evans of State Street Global Markets in Hong Kong say Thailand's baht may slide more than 3 percent by year-end, leading global funds to pull money from the country.

Malaysia's Woes

Events in Malaysia also are troubling. Again, this is an economy than won kudos following the Asian crisis a decade ago. Malaysia's headline-grabbing backlash against the International Monetary Fund moved to the background as growth returned, stocks rose and commodity prices soared.

Now, headlines are filled with ``sodomy'' and ``opposition official arrested'' and ``leadership crisis.'' The personality in question is Anwar Ibrahim, who's been accused of having illegal sex with a man. This week, Anwar won back a seat in parliament, increasing his chances of ousting Prime Minister Abdullah Ahmad Badawi. Malaysia's government is adrift when its economy can least afford it.

``At a time when Asia is under pressure from external forces, strong and stable leadership is crucial,'' says Simon Grose-Hodge, a strategist at LGT Group in Singapore. ``Malaysia and Thailand seem unable to deliver that.''

Biggest Surprises

Politics often offer the biggest surprises in Asian markets. In recent years, investors have found themselves less shocked by reports on gross domestic product, inflation or stock movements than coup attempts, scandals or disagreements between neighboring governments.

Disputes abound: China and Taiwan over sovereignty, Japan and South Korea over rocks in the sea, Indonesia and Singapore over pollution, India and Pakistan over disputed territory, Thailand and Cambodia over borders and North Korea and the rest of Asia over nuclear weapons. The Philippines is often on guard for the next ``people power'' rebellion.

Politics is holding Asia back, distracting officials from spreading the benefits of growth, reducing poverty, improving education and upgrading roads, bridges and power system to compete in the global economy. It's also scaring away investors who are growing increasingly risk adverse as the global credit crunch worsens.

Success Story

The region does have its success stories, like Indonesia. Rampant corruption and persistent poverty aren't undermining President Susilo Bambang Yudhoyono's efforts to put Southeast Asia's largest economy on a higher growth path.

``Indonesia,'' says Bruce Gale, a political risk analyst based in Singapore, ``is a lot more stable politically than many foreigners seem to realize.''

Yet politics is even getting in the way of Asia's most developed nations. Take Japan, which is experiencing paralysis at the highest levels of government. Prime Minister Yasuo Fukuda's slipping political support is complicating efforts to shield Asia's largest economy from recession.

Recent declines in markets speak to how Asia hasn't decoupled from the U.S. economy, as pundits once asserted. This period of global instability would be less dangerous if governments were better equipped to handle them.

The fallout from Wall Street's losses continues to flow this way. Michael Dee of Temasek Holdings Pte, Singapore's $130 billion sovereign wealth fund, yesterday found himself in the surreal position of voicing confidence in the once mighty Merrill Lynch & Co.

Merrill has a ``great franchise which has existed through many crises through a long period of time,'' Dee, Temasek's senior managing director of international, told Bloomberg Television.

Unique Asia

Since December, Temasek, Merrill's biggest shareholder, has invested about $5 billion in the third-largest U.S. securities firm. Dee said he has ``great confidence'' in Merrill Chief Executive Officer John Thain. Last year, Thain replaced the ousted Stan O'Neal, who oversaw the firm's largest quarterly loss in its 93-year history.

If Southeast Asia is to stand its ground amid a potential U.S. recession it needs more predictable and transparent government. Only then will economies have credible institutions like judiciaries, central banks, media and watchdog groups to weed out corruption. From there, more efficient and stable economic growth might follow.

All this sets Asia apart from many of the world's markets. Analysts typically assess economies by locking themselves in offices and studying government data, bond yields, stock valuations, and the like. Here in Asia, more luck might be had looking out the window at the street demonstrations below.

(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: William Pesek in Tokyo at wpesek@bloomberg.net