Election season in Asia

Two major Asian economies will hold elections this month: India and South Korea.

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The South Korean elections will determine the composition of its national assembly, while the Indian poll will determine which party will form the central government and its Prime Minister.

"The election outcome will be important from a domestic policy standpoint but may have limited impact on South Korea’s financial markets.”

With these two economies such important engine rooms for Asian growth, what do these elections mean for the region?

South Korea

The South Korean general elections will be held on 10 April.

South Korea follows a presidential style of leadership with the current president, Yoon Suk Yeol, halfway through a five-year term. The elections will determine the composition of the national assembly for the next four years.

President Yoon’s People Power Party (PPP) currently holds a minority of seats in the Parliament, with the opposition Democratic Party of Korea (DPK) holding the majority. The focus of this election is whether the PPP can secure a majority, paving a smoother path for policies and passage of bills.

In the event of a close contest, as is expected, the smaller parties may sway the outcome with the formation of alliances and a coalition.

Recent opinion polls suggest it will be a close contest with the PPP in the lead.

The PPP is generally perceived as a conservative party. Diplomatically, it has a friendly relationship with the US, one of South Korea’s largest export markets.

Conversely, the DPK is seen as a centrist or centre-left party, despite having internal factions that range from centre-left to centre-right on the political spectrum.

Technology and electric vehicles

A PPP-led majority would pave the way for the government to focus on issues such as high inflation, financial stability amid high leverage and furthering progress in new technology and electric vehicle development.

It would reinvigorate President Yoon’s domestic agenda on business-friendly policies, such as taking on labour unions, reducing regulation and tax cuts for companies.

A DPK-led Parliament would mean President Yoon will struggle to build consensus and pass legislation during the remainder of his term.

While a material shift in government policies is unlikely, fiscal policy could become less conservative at the margins.

A DPK-led national assembly would be perceived as having anti-incumbent sentiment and may challenge President Yoon’s, and indeed the PPP’s, position in the presidential election in 2027.

For these reasons ANZ Research thinks the election outcome will be important from a domestic policy standpoint but may have limited impact on South Korea’s financial markets.

India’s poll

Meanwhile in India about 969 million eligible voters will cast ballots in seven phases from 19 April to 1 June to elect 543 members of the Lok Sabha – the lower house of India’s bicameral Parliament.

This is the nation’s largest and longest election. The results will be announced on 4 June.

The Prime Minister is the head of the government and must garner majority support in the Lok Sabha. By extension, the majority party or coalition in the Lok Sabha has an instrumental role in determining who takes that role.

The National Democratic Alliance (NDA) is currently in majority, with the Bharativa Janata Party (BJP) holding the largest share of the coalition. The current Prime Minister, Narendra Modi, is a member of the BJP and will be seeking his third five-year term.

Opening the economy

India has a multi-party system, but two parties dominate politics at the national level: the BJP and the Indian National Congress (INC).

The BJP is generally perceived as having a right-leaning philosophy. The economic policies in the last two terms have broadly focussed on privatisation and opening the economy to foreign capital.

At the same time, the government also introduced ‘Atmanirbhar Bharat’ and ‘Make in India’ policies to increase self-sufficiency and build economic resilience.

Broadly, investors perceive BJP policies as business friendly. The INC is generally seen as a centrist party with a welfare-state philosophy.

So far the NDA is comfortably ahead in all opinion polls, even considering their margins of error. ANZ Research believes financial markets have priced in expectations of a BJP-led victory. The focus now is on the margin of the win.

ANZ Research has examined three different result scenarios and their possible impacts on the rupee and the Indian Reserve Bank’s monetary policy.

If the NDA wins an overwhelming majority, ANZ Research thinks this could spur a modest rally in equity markets, buoying the currency.

We think the Reserve Bank of India will be watchful of any sharp appreciation trend, stepping in to augment its foreign-exchange reserves and cap any sharp moves.

If the NDA wins with a smaller margin, ANZ Research thinks there could be some pressure on the rupee in the short term, particularly if the election outcome is underwhelming.

A possible correction in the equity market could lead to portfolio outflows, weighing on the rupee. Following the correction, we expect the rupee to stabilise and trade with a focus on fundamentals.

An NDA defeat would arguably lead to a sell-off in the equity and currency markets. ANZ Research expects the pressure on the rupee in this scenario would be particularly strong as investors reassess India’s political landscape and economic direction amid policy uncertainty.

The rupee’s strength, driven by strong growth, robust current account, easing inflation and gains from India’s bond index inclusion, will be tested if the election outcome shocks the markets.

A big month

Polls can suggest one thing, but there are many elements at play in both elections.

The latest polls in Korea give the PPP a slight edge, but the survey results are within the margin of error suggesting swing voters, demographics and the turnout will be key factors in determining the outcome.

In India, polls put the NDA well ahead. But the markets will monitor how opinion polls evolve. Considering the election phases run for a couple of months, things can change.

Either way, it is a crucial month for democracy and two of Asia’s most important economies.

Bansi Madhavani is an Economist with Institutional at ANZ

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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