Southeast Asia's Crisis: Global Bust Exacerbating Structural Tensions

Includes: EWM, GMF, IDX, TTF, VNM
by: John Overstreet

There is no clear link between the Arab Spring, the eurozone crisis, and the current crisis in Turkey apart from timing and geography. The first started when an unemployed man was allegedly slapped by a police officer for selling produce without a license; the second when it was discovered that there were some problems in Greek accounts of their accounts; and the third when some trees were bulldozed at an Istanbul park. All of a sudden, deep rifts appeared in once-formidable political orders throughout the region, sparked by otherwise trivial and seemingly unrelated events.

While those crises rumble on around the Mediterranean, it appears to be Southeast Asia's (NYSEARCA:GMF) turn now. As the easy money of the emerging market boom dries up, long-running political, social, and ideological feuds are reigniting and feeding off of urban, middle class anger over corruption. Although each situation has its own dynamics, the common theme of structural stagnation colliding with the turbulence caused by the commodity bust seems to hold.

As the protesters in Cambodia and Thailand pause for the New Year, here is a brief look at the building tensions going into 2014.

emerging asia/spy


In Cambodia, the ex-communist Prime Minister Hun Sen, who has effectively ruled the country since the fall of the Khmer Rouge, is facing his stiffest democratic challenge since he removed the opposition co-prime minister in the late 1990s. Although headline economic growth remains strong, a perennially divided opposition of royalists, liberals, and labor has unexpectedly managed to pull itself together under the banner of the Cambodia National Rescue Party (CNRP) and put increasing numbers of protestors on the streets of Phnom Penh since the contested election results of July. Garment workers, who make up a significant portion of the Cambodian workforce, have now gone on strike, demanding immediate 100% wage hikes, with the encouragement of the CNRP. Public sector workers have threatened to go on strike, as well.

There is little incentive for the opposition to back down, as long as popular support remains and the goal is to break the vice-like grip that Hun Sen's political machine has had on the state apparatus. The traditional weakness of the opposition is reason for the ruling party to play for time and to try to fracture the coalition with threats and blandishments, and it is also reason for the opposition to do everything it cannot to lose momentum.

Although Hun Sen still has control of the levers of power, by all outward appearances, the protest's swelling numbers suggest that the opposition may have the capacity to shut the capital down. Although a peaceful resolution is possible, there is no apparent basis for compromise yet. Late last week, Hun Sen was threatening the intervention of a "third hand," suggesting that the confrontation will ultimately be a test of wills on the streets with the ideals of democracy, rule of law, and compromise being used as pawns.


In Thailand (NYSE:TTF), with the collapse in commodity prices, the long-running battle between oligarchs has spilled out onto the streets again, with the ostensibly royalist protestors promising to shut down Bangkok after New Year's, if the Pheu Thai-led government does not stand aside in favor of a council of wise men. Public debt has surged as the government has struggled to scrounge up money for rice farmers in the north (the demographic base of the Shinawatra regime) while increasing pay to rubber farmers in the south (where the government is less popular).


Thailand has been through nearly twenty coups (of varying degrees of effectiveness) in less than a century, so it can be hard to be certain whether something new is happening there or it is just business as usual. Although the faces remain much the same (Abhisit, Suthep, King Bumibol, Queen Sirikit, the Crown Prince, Thaksin Shinawatra, and the army), the ritualized fighting on the streets and power struggles behind closed doors among these interests has created a vacuum of legitimacy and credibility in Thai society. The long-running political conflicts between north and south, city and country, royalist and republican, rich and poor both exacerbate, and are exacerbated by, the outmoded political system.

At present, the apparent gambit on the part of the opposition which, as in Cambodia, is made up largely of middle class voters from around the capital, is to provoke enough chaos to demonstrate the illegitimacy of the government and to give the army pretext to intervene before the February 2 snap election (which the protesters surely know they cannot win). The Shinawatra caretaker government seems to have avoided taking the bait so far, but when protesters return to the streets after the New Year festivities and violence escalates again, it will require exceptional skill for the government and police to show even-handedness, in the face not only of provocation on the ground but against the spin and dirty tricks that will likely follow.

The army has expressly refused to rule out a coup, but as respect for Thai institutions diminishes, it will probably require a greater degree of mayhem in order for it to overthrow a government weeks before an election. Since the opposition has refused to participate in the election and is actively stymieing it, the expectation has to be that things will continue to escalate as that date approaches.

As for the monarchy, strict laws against open discussion of its internal condition and role in society make reliable information hard to come by, but it appears that it lacks the wherewithal to intervene without further crippling what is left of its legitimacy.

The zero-sum game of power and prestige in Bangkok is squeezing out the moderates for now, but there also seems to be growing awareness of a need for deep reform, particularly with respect to the roles of the monarchy, the military, and the oligarchs in a society aspiring to be democratic, in order to escape the endless cycle of instability. The worry is that the traditional bases of power (piety/status, guns, and money) will have to exhaust themselves and the country further before things get better. The question might therefore be how bad must they get, and how long must they remain that way? Although a full-blown civil war is hard to imagine, the situation could remain extremely unsettled for years.

It has to be pointed out that Thailand's cultural and ethnic kin next door, once deprived of powerful monarchies, have tilted towards civil war, genocide, and dictatorship. The slow-motion, turn-based civil war that is usually restricted to the streets of Bangkok has been a model of constitutionalism and democracy in comparison.

In the end, the civil war that is playing itself out at every level of Thai society will likely leave at least one institution severely circumscribed in the long term, and that is likely to be the monarchy. If that is the case, the stabilizing role of the monarchy as an institution will increasingly be placed on the military, just as it has been in Myanmar. Unfortunately, there is no indication that any party or institution, whether royal, military, or civilian is as yet ready to establish or maintain a viable constitutional order more stable than Pakistan's.

The underlying problem is that the plurality of factions each base their legitimacy on rather disparate foundations. Democracy, stability, religion, and raw power each have powerful claims on Thai society, and depending on the disposition of power at any given moment, the weakest factions can appeal to any of these sources of legitimacy to upset the apple cart. Thus, today's royalists were yesterday's democrats, and today's legalists were yesterday's rebels.

As the global economy continues to shift gears from the emerging markets theme, economies with unstable political systems can expect to see the consequent shift in political influence played out on the streets.

For an idea of what Thailand might look like without its monarchy, we can turn to Myanmar.


Although there has been a great deal of optimism about Myanmar's prospects since the establishment of a nominally civilian government and the promise of democratic reform, the claim that the democratic genie is "out of the bottle" is extremely premature. It has to be remembered that the military dictatorship first arose in response to the centrifugal tendencies of the post-independence democracy in the 1950s and '60s. Those tendencies have quickly resurfaced in the last couple years. Not only do Myanmar's numerous ethnic conflicts continue to simmer, but the return of Bamar-Buddhist chauvinism has only grown since the reforms began, and it has been championed by "liberals" as much as anybody else.

At present, the government, led by former general Thein Sein, appears to be worried about not attracting enough Japanese and Western investment to kick-start the economy before elections, with the implicit promise to foreign investors apparently being that if the developed world brings in money, rule of law will then be guaranteed, which seems to be much the same offer being made to the people of Myanmar: vote for us and you will get as much democracy as you like.

The military retains control of the country by means of its political proxy, the Union Solidatiry and Development Party, which possesses over half of the seats in parliament, its monopoly on violence, and its numerous business interests. It is constitutionally guaranteed a quarter of the seats in parliament after the 2015 election.

The Tatmadaw (the military) seems to be attempting to split the difference between the Chinese and Western paths of development. It is desperately trying to bring in Western investment (China and Hong Kong take up nearly 60% of FDI) while democratizing by fiat, never mind that there are no institutions designed to accommodate fair competition in business or politics. The army retains controlling stakes in both. In 1990, even though protesters managed to force the military-backed socialist government to hold free and fair elections and won them in a landslide, the military had little difficulty tossing the results in the bin and political opponents in jail.

Even if democracy does take root, what guarantee is there that the cycle of Buddhist-Bamar extremism and ethnic conflict a la Sri Lanka, Myanmar's ideological soul mate, will not follow? Almost all of the foreign optimism about Myanmar's fortunes rest on the goodwill of the generals and the person of Aung San Suu Kyi, but she, like the democratic sincerity of the generals, remains untested and largely shut out of the reform process. Her reluctance to speak out against the violence in Rakhine state or to take a firmer line against the generals speaks volumes about just how delicate the situation in Myanmar remains.

As I write this, the government has announced some type of general amnesty for political prisoners, which is naturally welcome news. However, as we have seen in Egypt, political prisoners can be captured and released with ease in military dictatorships. If the Tatmadaw does not divest itself of both its economic and political roles, and a more inclusive, constitutional political culture cannot step up to the problem of reconciling order and freedom, Western and Japanese companies will be wise to continue avoiding matching Chinese levels of investment in Myanmar.


As for Laos, it remains politically quiescent so far. The disappearance of the developmental activist Sombath Somphone seems to have barely left a ripple, but the government is struggling to pay civil servants and public debt is ballooning now that the commodity bust is here. Because of the linguistic and cultural bonds between Laos and Thailand, especially the northeastern, Isaan region of Thailand, a dramatic political shift in either could have repercussions on the other side of the Mekong. The relative lack of a developed urban middle class may have something to do with why Laos has been as quiet as it has been so far, but without the commodity boom, some degree of public competition for money and power may not be far off.


Governments in the Buddhist core of Southeast Asia are having trouble paying up what they have implicitly promised their people in the wake of the collapse of global growth, and the urban middle class opposition seems to be inserting itself into the gap between the current power structures and their popular bases. The governments of Laos, Myanmar, Thailand, and Cambodia are all scrambling for money to sustain their grip on power, and this is exacerbating long-term structural problems in each of those countries.

Outside of that core, there appear to be structural changes going on in Indonesia, Malaysia, and Vietnam, too. Vietnam (NYSEARCA:VNM), like China and perhaps even North Korea, is struggling both with the end of the boom and the centrifugal political and economic tendencies created by greater openness. Although none of these Communist regimes have turned against the process of market liberalization, they have been clamping down on corruption and the press and focusing on consolidation of power at the center. They have also shown greater assertiveness abroad.


In Indonesia (NYSEARCA:IDX), there has been a sudden groundswell of support for the possible presidential candidacy of the governor of Jakarta, Joko Widodo, "Jokowi," which the political elites seem to be struggling to accommodate. He is perceived as having a popular touch, and has responded to demands in the form of a universal health care program for the city and setting a relatively high minimum wage. Severe challenges to Southeast Asia's growth model could make this sort of "generosity" and optimism about Jokowi's candidacy surprisingly short-lived, however. As Som Chee Kong thoroughly explains, although Indonesia's debt ratio remains relatively low, the economy is slowing and debt is rising.


Malaysia (NYSEARCA:EWM) has a similar portfolio of political and economic challenges to the rest of the region. Najib Razak's government has stumbled at the ballot box after its failed attempt to appeal beyond its Malay base in elections earlier this year. It has been forced to raise taxes and cut subsidies in order to restrain debt. Malaysia has also been clamping down on the press, recently shutting down a weekly publication after it published an article entitled "All eyes on big-spending PM Najib."


The response to weakening support for Najib's government is to shift to the right, with a reemphasis on the preference not only for the bumiputra (the ethnic Malay "sons of the soil" rather than Chinese and Indians) and Islam but for Sunni Islam, in particular.


Broadly speaking, across the globe, those who have benefited most from the boom of the previous decade will face increasing pressure to reform politically and economically, while more developed economies (the US, Japan, and northern Europe) have managed to avoid the worst of the aftermath of the economic crisis despite fears that it was they who would be sunk by excessive debt.

It is not clear how things will progress from here. The extremes of the last commodity boom-bust cycle in the late 1970s and early 1980s marked the beginning of political, social, and economic liberalization in the Eastern Bloc (as well as the West and in right-wing dictatorships) that eventually culminated in the mostly peaceful revolts of the late 1980s. Over the course of the 2000s, that reform slowed, populist oligarchs apparently capitalized on the boom, and there was enough to distribute to their clients, too.

Now that the money is drying up, those arrangements no longer seem tenable. In order for stability to return, new, more modern faces and sentiments will eventually have to step to the fore in order to implement the structural political and economic reform that has been put off for too long.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.