Asean stock markets led by Indonesia, the Philippines and Thailand with double-digit gains were relative first-half shelters from China and India, where MSCI index losses reflected internal financial system woes, as the region absorbed more end-June safe haven inflows from Europe’s Brexit crisis.

Malaysia, Korea and Taiwan also slightly increased despite political and geopolitical roadblocks, as stimulus packages and official rhetoric underscored the economic model shift from export to domestic demand reliance. In the frontier list, Pakistan was the big winner after MSCI returned it to the core universe, while Vietnam eked out a positive return amid growing doubts over US ratification of the TPP free trade pact it will benefit most from as a signatory according to recent studies. East Asian shares head into the second half of the year with Chinese commercial spillovers still a major risk and leadership vision and transition open questions. They must also build on a regional rotation rationale with convincing institutional reforms and stabilization to preserve investor momentum.

Indonesia surges

Indonesia was up almost 15% on a central bank interest rate cut to help preserve 5% growth, after Q1’s disappointing fixed investment and vehicle sales figures. The fiscal deficit worsened from the original target to 2.5% of GDP with lower tax collection the government plans to offset with an amnesty estimated to bring in as much as US$5 billion. The proceeds could combine with an estimated US$20 billion in foreign direct and portfolio investment this year for an overall balance of payments surplus covering the 2% of GDP current account gap. The benchmark rate reduction may also boost credit growth, which slipped to single digits with higher reported bad loans at the main state banks.

President Jokowi has redeemed early stumbles with follow-through on infrastructure projects and sector openings after a flurry of initiatives. He also won respect by taking on the political establishment to appoint a young new police chief with anti-corruption credentials. The Golkar party formally left the opposition to join the President’s PDI-P led alignment in May, and the current Jakarta governor will follow his example by campaigning for re-election as an independent. A national health care program passed by the previous administration has also been launched, and may add another leg to the consumer-driven economic story countering commodity export slowdown.

Duterte’s inaugural debut

The Philippines advance was almost the same as Jakarta’s, as President Duterte was inaugurated in a low-key ceremony befitting his average citizen law and order and job creation emphasis. The economic platform remains vague, but he intends to improve the public-private partnership infrastructure scheme and engage the “country’s best minds” for advice and policy-making. He may also stiffen “sin” taxes on cigarettes and alcohol to maintain fiscal balance, and refers to his business-friendly decades-long tenure as Davao mayor as a model to be extended. While exports have dropped for a year, internal demand continues to support 6% growth. However, poverty at one-quarter the population has not budged since the 2009 global financial crisis, and the president has railed at traditional family elites in charge of top banks and companies for perpetuating income inequality.

Thailand’s 17% climb bested the pack with the public infrastructure investment program at 7% of GDP, the highest in fifteen years. The military has tried this method to buy popularity and time as it considers a schedule for restoring civilian rule, and has been careful not to run up government debt by closing agricultural loan windows associated with the ousted previous leadership. Tourism has rebounded, with the currency no longer strengthening following outward investment liberalization and capital flight. Chinese arrivals may dip, but with inflation at only 1.5% the central bank can ease further, although banks are already flush with liquidity on low loan demand.

Malaysia (+3%) is the last member of the Asean core to enjoy a sudden uptick as the Prime Minister Najib Razak purged opponents and restructured the troubled 1MDB fund board. However, for this group, governance and debt issues will have to be resolved more decisively to repeat the pattern through year-end as a confidence vote rather than conflict avoidance strategy.

Gary N. Kleiman is an emerging markets specialist who runs Kleiman International in Washington DC

Gary Kleiman

Pioneer and recognized expert in the field of global emerging economies and financial markets. Founder of first consulting firm dedicated to providing independent analysis and advice to public and private sector clients in 1987, and research coverage and firsthand experience covers 75 countries in all developing regions. Advisor on financial vulnerability issues, risk management, portfolio allocation, and financial sector and capital markets strategy and development.