Elections may bring more risks than usual to Asian government ratings in 2024. Political and policy uncertainties often accompany elections. And weakened fiscal and external balance sheets could magnify their impact this year.

Government finances are still recovering from the damage dealt by the pandemic and inflation. Weak exports and increased capital outflows also weighed on sovereign external metrics last year. And just as inflation and interest rate expectations are coming down, the Israel-Hamas war makes further improvements more uncertain.

Governments typically have less policy flexibility around election time. Policy responses that cushion the impact on credit metrics are often unpopular among voters. Consequently, if oil prices rebound and capital outflows intensify because of a worsening of the conflicts in Europe or the Middle East, fiscal and current account deficits in parts of Asia may increase. Sovereign credit support may weaken materially in some cases.

The credit risks are greater for lower-rated governments. These sovereigns tend to have credit metrics that are more sensitive to negative external developments. Among those facing elections in 2024 are Bangladesh (BB-/Negative/B), Mongolia (B/Stable/B), Pakistan (CCC+/Stable/C), and Sri Lanka (foreign currency SD/SD; local currency CCC+/Stable/C). As the first among Asian governments to finish an election this year, Bangladesh may be less constrained than the others in its policy reaction.

Bangladesh: Slowing Capital Outflows A Priority For Government

The Jan. 7 elections in Bangladesh returned the Awami League (AL) to power for another term of office. With the main opposition party--the Bangladesh National Party (BNP)--boycotting the elections, the AL easily won more than two-thirds of parliamentary seats. This strong majority should help the government to make policy changes smoothly and quickly.

And the government may need such policy changes soon. External metrics underpinning the credit ratings on Bangladesh have been weakening since early 2022. The sharp depreciation of the taka exchange rate and policies to restrain imports helped to bring the current account balance to surplus by early 2023. However, capital outflows have continued to drain foreign exchange reserves. The government recently imposed more restrictions on banks' ability to transfer funds offshore to slow these flows.

With a little more time after the elections, these outflows may ease with improved political certainty. But if they don't, then further declines in foreign exchange levels could materially weaken sovereign credit support. As the negative outlook on the Bangladesh long-term sovereign rating implies, this could result in a lower rating on the government.

Taiwan: Material Change In Cross-Strait Relations Unlikely

Taiwan is another place where elections are also held early. The outcome of the Taiwanese leadership election in mid-January was widely expected: facing a divided opposition, Mr. Lai Ching-te from the ruling Democratic People's Party (DPP) won easily. However, his 40% vote share was much lower than his predecessor's 57% share in 2020. The DPP also lost its majority in the Taiwanese legislature in the concurrently held parliamentary elections.

We don't expect the election results to materially affect security and geopolitical risks reflected in the ratings on governments in the region. The relationship between the Taiwanese and mainland China governments are unlikely to improve under another DPP-led government, in our view. However, the risks of a serious confrontation are also not much higher than before.

We believe that the mainland China government will avoid an unnecessary conflict over Taiwan to focus on its continued economic development. The Taiwan government will likely be wary of actions that will raise tensions as since both investors and citizens have become more concerned about the risks of a conflict. Allowing the cross-strait relationship to deteriorate materially will come at significant economic and political costs that could undermine economic support for the ratings on the Taiwanese government.

The DPP's legislative losses would likely slow policy-making. Unaffordable housing and low wages were reportedly the reasons why many young voters turned away from the two main traditional parties this January. Even if the incoming administration finds new ways to address these intractable problems, passing the necessary laws will be challenging. This may also limit the new government's ability to de-escalate cross-strait tensions. Unable to win back young voters, it will be more reliant on the DPP's traditional supporters, who are mostly against increasing engagements with the mainland China government.

Polls To Come

In the Asian electoral contests that are scheduled for this year, the credit implications are much more domestically focused than the one in Taiwan. In the following, we discuss the credit significance of each:

India

The Indian general election is slated to be held before June 2024.

Following nearly a decade of rule by the Bharatiya Janata Party (BJP)-led National Democratic Alliance government, a change in the ruling coalition could bring a period of policy uncertainty. Investors and businesses may take some time to decide if India's strong growth could continue under a government led by a different coalition. Most market commentators, however, are projecting that the BJP will continue to lead the next government.

Our sovereign ratings on India will still depend on economic growth trending above average and strong external metrics. The success of the next government in funding large infrastructure investment without widening the country's current account deficit will remain important. If India can shrink the fiscal deficit significantly while achieving these objectives, rating support could strengthen over time.

Indonesia

The presidential and legislative elections are scheduled on Feb. 14, 2024.

The elections this year will bring in a new administration since the current president, Mr. Joko Widowo, cannot run for a third term. The legislative election will likely produce a parliament in which, as before, no party wins a majority of seats. Like the current government, the new administration will try to build a coalition of friendly parties to facilitate the passage of laws.

We don't expect significant shifts in economic policies under the new government that will take office in October. Fiscal policy is anchored by the legal requirement to keep the annual budget deficit within 3% of GDP. Monetary policy is also guided by publicly announced inflation targets. The deficit limit can be exceeded, and the inflation target raised. However, such changes will come at significant political costs. They may also create volatility for the rupiah exchange rate, something that Indonesian policymakers are wary of.

Indonesia sovereign credit support has been bolstered in the past few years by growing export and government revenues. Further policy support for new investments that promote non-energy exports and tax collections could strengthen credit support even more. Whether this happens depends on how the next government balances the urge to accelerate the development of commodity processing in Indonesia against the loss of exports as it restricts the sales of raw commodity overseas to encourage such investments.

Korea

The next Republic of Korea parliamentary election is scheduled for April 10, 2024. The elections will vote in a new National Assembly but the president, who heads the administration, will remain unchanged. If the election returns a majority of seats for the People Power Party, of which President Yoon Suk Yeol is a member, it could facilitate the passage of government-supported laws. Currently, the opposition Democratic Party is the majority party in the National Assembly.

The shape of the next Korean legislature is unlikely to materially change sovereign rating trends. The most likely triggers for changes to the sovereign ratings are related to geopolitical risks that are beyond the control of the National Assembly or government.

Mongolia

The Mongolian parliamentary election is scheduled to be held on June 28, 2024. This election will determine an expanded 126-member parliament (up from 76 previously), as specified in a constitutional revision in June 2023.

We do not believe that a change in the ruling party will make significant changes in Mongolia's policy environment. The ruling Mongolian People's Party (MPP) and main opposition Democratic Party (DP) do not differ materially on economic and fiscal policy thinking, in our view.

Mongolian sovereign metrics will benefit from the steady operation of the major mines in the country. The next government can facilitate this by maintaining a stable relationship with the foreign companies operating these mines. Over a longer period, sovereign credit support could strengthen if we perceive that governance and policy predictability have made significant progress in ways that smooth out business operations and encourage stronger investments.

Pakistan

The Pakistani general elections are scheduled to be held on Feb. 8, 2024.

Pakistani politics has been in a state of flux since the ouster of former Prime Minister Imran Khan of the Pakistan Tehreek-e-Insaf (PTI) party in a parliamentary no-confidence motion in April 2022. The political turmoil has hampered the government's reform efforts to deal with economic challenges in the last two years and has damaged sovereign credit metrics.

A more stable political environment in Pakistan is likely an important precondition to repairing the government's creditworthiness. If the coming elections yield a government that has popular support and able to work with key institutions in the country, it will have a better chance of securing external financing from the IMF. Together with new policy moves to improve investor confidence and bring down inflation, this could lift fiscal and external metrics sufficiently for the sovereign ratings to move to the 'B' rating category.

Sri Lanka

The presidential election is likely to happen between September and October 2024. Parliamentary elections could also be held in 2024, even though they are due only in 2025. President Ranil Wickremesinghe has mentioned that he'd dissolve parliament this year and hold elections.

The government's default on foreign debts has constrained its economic and fiscal policies in the past two years. Unable to raise new external commercial debt, it must limit spending to keep both fiscal and current account deficits down as well as preventing inflation from rising further. It has also had to implement structural reforms as part of the IMF program that provides the government with loans from the institution.

Restructuring Sri Lanka's external debts is a key task for the government this year. If it is not completed by the time of the elections, it will be among the top priorities of the next government. Regaining access to commercial foreign financing will help to strengthen investments that could accelerate the country's economic growth. A successful debt restructuring is also needed for the sovereign ratings to move out of default.

If the parliamentary elections also go ahead this year, there is a chance that it may result in a new legislature that is less accepting of the reforms under the IMF program. However, the country's need for the continued flow of external funds likely mitigates this risk.

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