Election results in emerging markets – cause for optimism

The past two years have been particularly challenging for emerging markets, being marked by significant geopolitical turmoil. The Russia-Ukraine war and the Gaza war dominated headlines, while China faced a looming property crisis. As 2024 unfolds, a record number of elections have kept political and geopolitical risks high. However, the first half of the year has brought unexpected positive developments. Economic growth has shown remarkable resilience, largely due to successful inflation control, which boosted disposable incomes and facilitated lower interest rates, spurring investment. Additionally, elections in several major emerging markets, despite yielding surprising results, have underpinned the strength of democratic systems and institutions, reflecting the people’s desire for change. Despite potential post-election volatility as new governments establish their policies, the medium-term outlook for these countries remains stable or has even improved slightly.

At the beginning of June, India, the world’s most populous democracy, held general elections, in which over 960 million Indians were eligible to vote. To ensure that every person could cast their vote, election officials toured with electronic voting machines throughout the country to the most remote places, even to the Himalayas: no one was supposed to travel more than two kilometres to the next polling station. This is prescribed by Indian electoral law.

Narendra Modi's Bharatiya Janata Party (BJP) remained the clear winner, but unlike after the 2014 and 2019 elections, it fell short of a majority and thus relied on its coalition partners within the National Democratic Alliance (NDA) to remain in power. In the near-term, there are risks that the party will shift towards populist spending measures to strengthen its standing among the population which could derail the fiscal situation. Nevertheless, the new cabinet reflects political continuity, as most ministers, including the four top ministers, remain in office. There are many indications that the reform programme that has been under way will be continued. This includes infrastructure projects, modernisation, and improvement of production sites so that the friendshoring trend can be exploited. Moreover, Modi's weaker position could also have positive effects if it can prevent further autocratisation of the country and rein in Hindu-first policies. These factors contribute to our positive growth outlook for the world's fastest-growing major economy.

In Indonesia, the largest country in Southeast Asia, Prabowo Subianto had already won the presidential election in the first round in February 2024. With a successful social media strategy and performances on TikTok, Facebook, etc., he won the votes of many young people. This group was considered decisive in the election, as millennials and GenZ made up more than 50% of the eligible voters in the world's third-largest democracy.

Under the government of Prabowo's predecessor Joko Widodo, known as Jokowi, Indonesia has become one of the most powerful players in the Indo-Pacific since 2014 and has experienced significant economic growth propelled by investments in infrastructure and key social programmes. Although Jokowi’s consecutive two terms precluded a third run, his political legacy is poised to persist, not least through the nomination of his eldest son as vice president. Moreover, Prabowo committed to political continuity and is expected to build on Jokowi's robust economic record. Despite Prabowo’s inclination towards nationalism and populism raising questions about the future of fiscal policies, it is anticipated that the economic strategies will largely stay the course. Consequently, the nation’s economic growth is expected to maintain its upward trajectory, surpassing the 5% mark.

After thirty years in power, the African National Congress (ANC), the esteemed party once championed by Nelson Mandela, has lost its absolute majority for the first time. Compared to the 58% of the vote in 2019, the ANC received only 40% in May 2024. Younger voters, those born after 1994 – the so-called "born frees" – were particularly dissatisfied and do not harbour nostalgic feelings towards the former liberation movement, as do the older generations who experienced the apartheid regime and its abolition.

The election result reflects the ANC's inability to effectively address the country's economic problems: South Africa is struggling with an unemployment rate of over 30% and sluggish GDP growth averaging around 1% over the past decade due to investment deficits, inadequate water and electricity supplies, widespread corruption and crime.

President Cyril Ramaphosa's ANC has now agreed with several parties, including the main opposition party, the Democratic Alliance (DA), to form a governing coalition. This alliance, known as the “Government of National Unity”, is set to steer the course of Africa’s most robust economy. In an optimistic scenario, the market-oriented DA could trigger a stronger reform dynamic. However, ideological differences could introduce complexities in the coalition’s decision-making processes. Also, the main left-wing opposition parties, the uMkhonto weSizwe (MK) and the Economic Freedom Fighters (EFF), could try to block the legislation, potentially increasing instability. Ramaphosa has cleared his first hurdle; the next challenge is getting everyone to work together. Therefore, we remain cautious in our assessment of the country's economic prospects.

Claudia Sheinbaum of the ruling left-wing Morena party won a landslide victory in Mexico’s general elections, securing an overwhelming majority in both chambers of Congress. She will be the first woman to govern the largest Spanish-speaking country in the world.

The strength of her mandate carries a certain risk that her party could pass the constitutional reforms pushed by incumbent President López Obrador before she takes office on 1 October. It is above all the controversial judicial reform that is a cause for concern, as it provides for Supreme Court judges to be elected by the people. This would undermine the independence of the judiciary and weaken the country's institutional framework. However, there are indications that Claudia Sheinbaum, a climate scientist, may adopt a more technocratic approach than her predecessor. She promised to be fiscally prudent, to keep the respected finance minister in office and to promote private investment. This promise seems credible, as she has already promoted public-private partnerships in her previous role as Mayor of Mexico City. Short-term risks therefore arise from the institutional aspects mentioned above. In the medium term, however, the president's stance could have a positive impact on the country's development.

With the first half of 2024 behind us, the major election uncertainties for emerging markets have been resolved. Based on these election results, we maintain a cautiously optimistic outlook. Looking ahead, we thus expect these markets to exhibit a stronger growth differential compared to the developed world in the medium term.