Elections and Inflation: Why Global Markets Are Going Bonkers

As major elections are set to occur this year and next in countries worldwide, financial markets are experiencing turbulence due to political issues.

According to the Nihon Keizai Shimbun (Nikkei) on the 15th, Thai Baht shows significant volatility. Although the closing price remains around 35 baht per dollar, it has been fluctuating, sometimes exceeding 36 baht during trading.

The Baht’s exchange rate has been significantly shaken since the newly appointed Prime Minister Seta Taweesin announced emergency economic measures on the 10th. The Seta regime plans to distribute 10,000 baht (approximately $300) in cash as digital currency to 50 million Thai citizens over 16 with a monthly income of less than 70,000 baht and savings of less than 500,000 baht by May next year. The total scale, including tax deductions for cash payments, is 600 billion baht (approximately $18 billion), equivalent to 3% of Thailand’s Gross Domestic Product (GDP). The market expects the government debt to expand further as support is added to the already bloated fiscal operation due to COVID-19 measures. The ratio of government debt to GDP is estimated to rise from 62% at the end of September to 70% when this policy is implemented. Securities companies and major credit rating agencies have expressed concern that expanding public debt could affect credit ratings.

Political issues are also shaking the stock market in Argentina. The Argentine stock index, MERVAL, moved in the 820,000 point range as of October 17 but has fallen more than 20% to the 630,000 range in less than a month. This contrasts the stock indices of other Latin American countries, which have risen 4% in Brazil and 3% in Mexico during the same period. This is due to increased volatility ahead of the second round of presidential elections scheduled for the 19th. Initially, the vote was held on the 22nd of last month, but the first-place candidate, the ruling party’s Sergio Massa, failed to win 40% of the vote, leading to a rematch with the second-place Javier Milei. This Argentine presidential election pits left-wing populism (Sergio Massa) against far-right liberalism (Javier Milei), increasing uncertainty about the economy’s direction. Massa, the current Minister of Economy, has promised to reduce the aggressive dollar reserve increase to alleviate the foreign exchange crisis, renegotiate foreign debt, and reduce poverty through job creation. Milei, on the other hand, caused a sensation in the preliminary election with a radical promise to replace the national currency, the peso, with the US dollar, along with the abolition of the central bank. The peso, which Milei called “garbage that can’t even be used as fertilizer,” is maintaining a stable flow at the level of 350 pesos per dollar in the official government exchange rate, but the black market unofficial rate has jumped over 1,000 pesos per dollar, considerably breaking the value of the currency. Kumiko Ishikawa, a senior analyst at Sony Financial, explained, “If Milei, who calls for the abolition of the central bank and the national currency, wins, there is a possibility that the fall in the peso exchange rate and stock prices will accelerate.”

In Poland, where a pro-European Union (EU) opposition alliance won in the general election in mid-October, the national currency Zloty is soaring. Poland is facing a change of government as the opposition alliance has secured a majority and won. The rise in the Zloty exchange rate is due to expectations that the resumption of the distribution of the COVID-19 recovery fund by the EU will support Poland’s economic growth. The Nikkei reported that from the end of September to recently, the Zloty exchange rate has risen by 6% against the dollar, making it the best-selling European currency.

This turbulence in major markets is expected to intensify further. This is because there is a high possibility of changes in financial and fiscal policies to gain public support ahead of elections this year and next, as global inflation is emerging as a problem.

The Economic Policy Uncertainty Index (EPU), published monthly by the Booth Business School at the University of Chicago, was 251 in September, the highest level since March this year. This index is calculated by extracting articles mentioning economic uncertainty from major media reports in 21 countries, including the United States, South Korea, and Japan.