Omar Hamid, head of Asia Pacific country risk forecasting for IHS, examines the political and economic issues impacting five Asian economies.
Australia
The opposition Liberal-National Coalition won a decisive majority (90 out of 150 seats) in Australia’s House of Representatives in the September 2013 elections after three years in which the hung parliament led to policy uncertainty and legislative delays. Despite its mandate, the government is facing challenges implementing key policy aspirations. Although it controls the lower house, the Coalition will still be forced to negotiate with minor parties, the Greens, and Labour to push its agenda through the Senate, where it lacks a majority. Prime Minister Tony Abbott has failed in his attempts to repeal Labour’s “carbon tax” before the end of 2013, which he had said would be his first policy aim, given strong opposition in the outgoing Senate, which will remain sitting until the end of June 2014.
Workplace productivity is going to be a divisive political issue in 2014. Business groups have been claiming for years that worker productivity is falling and putting the blame on Labour’s Fair Work Act (FWA). It is likely that the government will use the December 2013 announcement by General Motors subsidiary Holden that it would cease production in Australia from 2017 as political cover to support the introduction of proposals to dilute or abolish the FWA. Particular targets for the Coalition government are likely to be union entry into the workplace and a shift back towards individual bargaining. This campaign is likely to be supported by the findings of a Royal Commission, which began its work in April 2014, with the aim of investigating the finances of major unions.
In the short term, this policy risks driving an increase in the level of confrontation between unions and employers as the former seek to press their advantage before new legislation comes into effect. However, the Coalition has to walk a political tightrope on industrial relations – on one hand pledging to increase productivity, while at the same time seeking to distance itself from the last Coalition government’s electorally disastrous WorkChoices programme, which contributed to its heavy defeat in 2007.
Thailand
Political instability risks and civil unrest risks escalate, following caretaker Prime Minister Yingluck Shinawatra’s removal from office. On May 7, Thailand’s Constitutional Court ordered the removal of Prime Minister Yingluck and nine other cabinet members, for violating the 2007 Constitution in connection with the unlawful transfer of National Security Council chief Thawil Pliensri in September 2011. This ruling followed the Court’s March 21 ruling to annul the results of the February 2 elections.
The ruling renders the prospect of a political compromise between the Pheu Thai and opposition forces even more remote. If the caretaker government refuses to relinquish power, the opposition is likely to escalate attempts to topple the remainder of the caretaker government via legal means.
Barring a political compromise, the caretaker cabinet is likely to press ahead in its negotiations with the Election Commission (EC) to hold fresh elections on July 20. Even if the government and the EC manage to agree on a date for fresh elections to be held, polling is likely to be disrupted by fresh street protests. The opposition People’s Democratic Reform Committee (PDRC), which has led anti-government protests since November 2013, remains firmly entrenched against the holding of new elections ahead of “reforms”, without having concretely specified what forms these should take. Attempts by opposition Democrat Party leader and former Prime Minister Abhisit Vejjajiva to broker a political compromise have also been rejected by both sides. The Democrat Party is therefore unlikely to agree to contest the July polls. Fresh elections in July, if boycotted by the opposition, are therefore unlikely to successfully resolve Thailand’s political paralysis. The palace is also unlikely to broker a compromise at this juncture.
Following the Prime Minister’s removal, anti-government protests are likely to intensify in Bangkok. The PDRC has already announced that it will begin a new wave of protests on May 13 and 14, as a “final push” to topple the Pheu Thai government. Pro-government Red Shirt supporters are also very likely to begin active mobilisation. There is an increased risk of Red Shirts escalating rallies throughout Bangkok (in the Bang Rak, Din Daeng, Dusit, Phaya Thai, Pathum Wan, Phra Nakhon, and Ratchathewi districts), as the opposition escalates attempts to topple the caretaker government via legal means. As the political paralysis drags on, Red Shirt rallies will increasingly be likely across provincial halls, government buildings, and military bases in the surrounding provinces (Ayutthaya, Nonthaburi, Pathum Thani, Samut Prakan, and Samut Sakhon), the north (Chiang Mai, Chiang Rai, Lampang, and Phayao), and northeast (Khon Kaen, Mukdahan, Udon Thani, and Ubon Ratchathani). Red Shirt supporters are, barring the full ouster of the caretaker cabinet, unlikely to deliberately cause major damage to these assets in the course of their rallies to avoid triggering a full military intervention.
That said, there is an elevated risk of cells of Red Shirt paramilitaries (operating in small teams of two to four) staging sporadic hit-and-run attacks on anti-government Yellow Shirt-affiliated assets (including banks, hotels and shopping centres like Kasikorn Bank and Central World) within Bangkok itself, via grenades, Molotov cocktails and petrol bombs. The purpose of these contained attacks on opposition-affiliated assets would likely be aimed at intimidating opposition supporters from forging ahead with their judicial coup. Prominent Yellow Shirt supporters themselves also now face elevated risks of being personally targeted in assassination attempts, as the country becomes increasingly polarised.
India
Despite deeply entrenched corruption, a labyrinthine bureaucracy, and recently disappointing GDP growth, India’s large domestic market and relatively benign security environment continue to present attractive business opportunities.
The extent of these opportunities and the political stability on which they depend will be shaped by whoever wins India’s 16th general election, which will conclude on May 12. The opposition Bharatiya Janata Party’s (BJP’s) election campaign is being spearheaded by its prime ministerial candidate, Narendra Modi, noted for his leadership of Gujarat, which has enjoyed significant economic development during Modi’s time as chief minister of the state. With the ruling Indian National Congress party faltering in pre-election opinion polls due to corruption scandals over the past five years and policy paralysis caused by continual disruption in the Lok Sabha (lower house of parliament), both domestic and foreign investors are increasingly confident that Modi will become prime minister and adopt broadly pro-business economic policies.
A BJP-led government after the election will probably increase investment opportunities, particularly in infrastructure, which the opposition party is keen to develop. These will be strengthened by the fact that any government after the election will enjoy renewed political capital, giving it roughly two years in which new legislation can be passed with relatively little opposition. Some firms have already announced their intention to invest heavily in Indian infrastructure: Bloomberg reported on March 18 that the India-based TATA Group plans to invest more than US$8bn in roads, airports and housing after the election.
Nevertheless, neither the BJP nor Modi are likely to be able to overcome the underlying risks facing foreign investment in India, such as bureaucracy and corruption; co-operation with state governments will be vital. For instance, as prime minister, Modi would very probably attempt to expedite stalled foreign investment projects, which are delayed by state government bureaucracies. However, a BJP-led government will probably face challenges in expanding its policies to states where support for the party is comparatively weak.
A BJP-led government would also almost certainly conduct a major review of the previous government’s energy policy. The BJP and Modi have made great efforts to woo corporate India, especially major industrial concerns like the Tata Group and RIL. A BJP government is likely to be more sympathetic to concerns raised by the private sector about issues pertaining to the oil and gas sector. Fresh auctions that are scheduled to be held before the end of 2014 will probably be delayed until 2015, as the new government tries to make the auction of these blocks more attractive for international majors.
Meanwhile India faces a persistent problem in its huge fuel subsidy bill, which was revised upwards to US$14bn for FY2014 in February. The government previously cut subsidies in June 2010 and September 2012, amid widespread protests and political opposition. However, despite not mentioning the issue in its manifesto, a BJP government too would eventually consider a subsidy cut. As chief minister of Gujarat, Modi gradually reduced subsidies in the state. However, Modi would probably be unwilling to immediately reduce subsidies and invite public criticism, especially after his party’s 10 years in opposition. A more likely scenario is the BJP seeking to boost economic growth in its initial few years in power, with the party then looking for a politically opportune moment to reduce government assistance.
Indonesia
The new government that will come to power in October 2014 is likely to continue the current policy of seeking better contractual terms from mining companies.
The Indonesian state anti-corruption body, the Corruption Eradication Commission (Komisi Pemberantasan Korupsi: KPK) on March 2 called on the government to enforce regulations increasing royalty payment rates for mining companies. The KPK said the state was sustaining losses because 37 mining companies operating under the Contracts of Work (CoW) regime and 74 coal mining companies operating under the Coal Contracts of Work (CCoW) are not paying the rates established in a 2012 mining ministry regulation. The rates vary according to the type of mineral and the calorific value of coals. CoWs and CCoWs are decades-old contracts signed prior to the enactment of the 2009 Mining Law, under which the ministerial regulation was issued. Major foreign mining companies such as Vale, Newmont and Freeport McMoRan operate under CoWs, which they believe protect them from any future changes in law. Vale and Freeport are among the companies that have said they were prepared to increase royalty payments. The Jakarta Post newspaper reported that Freeport Indonesia’s CEO, Rozik Soetjipto, told a parliamentary hearing on March 3 that his company was prepared to increase royalty rates it is currently paying under its CoW from 1% to 3.75% for gold and from 3.5% to 4% for copper, in line with current regulation. The newspaper also reported the director general for coal and minerals in the Energy and Minerals Resources Ministry, R Sukhyar, as saying that the royalty rise would apply retroactively from 2012. However, any effort to extract a retroactive royalty rate rise is likely to be resisted by mining companies.
Many companies believe that they have made concessions already by agreeing to rate rises not covered by their contracts. Royalty rates are one aspect within broader renegotiations currently taking place between the government and CoW companies. These also cover divestment, contract extension, the use of local goods and services, domestic processing, and reduction of concession areas. The government is seeking better terms in exchange for contract extensions. Any agreement over royalty increases will likely be part of a wider new settlement.
China
A Shanghai court’s detention of a Japanese ship, ostensibly for Second World War compensation, increases the risk of Japanese assets being seized not only for compensation, but also in the event of a dispute between China and Japan, over the disputed Senkaku/Diaoyu Islands.
The Shanghai Maritime Court on April 19 detained a Japanese ship in accordance with a 2007 judgment that ordered the ship’s owner, Mitsui OSK Lines (MOL), to pay damages of over ¥2.9bn (US$28mn) to two individual Chinese plaintiffs for losses incurred during the Second World War. The Court had said it will dispose of the detained ship if MOL continues to refuse payment. However, it was released on April 23 after Mitsui paid the damages and US$385,000 in court fees. Although Chinese officials downplayed the case as a “mere commercial dispute”, the Shanghai court’s decision establishes the precedent that Japanese assets may be seized as compensation for wartime damages.
At present, multiple lawsuits involving hundreds of claimants are pending at courts around China, seeking compensation from Japanese companies for forced labour performed during the war. According to Chinese media accounts, around 40,000 Chinese citizens were forced to work in Japan during the war, and 35 Japanese companies were involved. Although Chinese courts have historically dismissed all such suits, on March 18 an intermediate court in Beijing accepted a suit against Mitsubishi Materials and Nippon Coke & Engineering. This represented the first time that a suit filed by Chinese individuals for wartime damages has been accepted in China.
The change in position was likely influenced by strained bilateral relations over the Senkaku/Diaoyu Islands dispute, as well as a 2012 South Korean Supreme Court decision granting former forced labourers the right to seek individual compensation from Japanese companies. Since that ruling, several lawsuits have been filed in South Korean courts, and Japanese companies including Nippon Steel and Mitsubishi Heavy Industries have been ordered to pay compensation.
Intelligence cut-off date: May 9, 2014.
