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Manila. Spiraling political violence and the introduction of a new voting system raise the risk that national polls in the Philippines in May produce the outcome markets fear most of all: a failed election that nobody wins.

Asset prices in the Philippines are generally resilient to violence and lawlessness, particularly in the southern islands. And investors have long become accustomed to the “guns, goons and gold” culture of elections in the archipelago.

But even markets that generally take unrest and insurgency in stride would be unsettled by one particularly dangerous scenario, in which the elections do not give any candidate a credible mandate. That could lead to months of uncertainty and further delay overdue efforts to reduce the fiscal deficit.

The risk of this scenario becoming a reality remains relatively low. But with political killings running at an unprecedented level and doubts surrounding the implementation of automated voting, it cannot be ruled out.

And the uncertainty is likely to act as a drag on markets in the months ahead.

“The constraint we face is that even if we see risk aversion offshore dissipate, the election risk premium may curtail any bullish sentiment or optimism in the local market,” said Jun Trinidad, an economist at Citigroup in Manila.

Some fear that the new system of automated vote counting, aimed at preventing fraud, could stoke increased violence.

“The automation process has changed the rules of the game and politicians who fear they can no longer manipulate poll results are more tempted to eliminate one another,” said Benito Lim, a political scientist at Ateneo de Manila University.

Some politicians may also use intimidation to scare voters on election day, resulting in low turnout, he said.

A high level of violence will not, by itself, be a major shock for markets, they are used to it. The average death toll for the four-month election period every three years in the Philippines is around 100, government records show.

But if unrest reaches a level that threatens the legitimacy of the election or if automated vote tallying proves problematic, it would be a different story.

That would impose a much higher risk discount on Philippine asset prices, analysts say. Investors would shun long-term debt paper and shift to short-term holdings or sell altogether.

Antonio Herbosa, managing director at the Center for Global Best Practices, a financial advisory company, said if the elections failed, the stock market’s main index could tumble below 2,600 points to the lowest levels since July 2009. The index is currently trading around 2,940 points.

The peso, which has been strengthening against the dollar in line with other risky but bullish Asian currencies, would also take a hit, analysts say.

If an election failure was solely due to technical problems, the impact on markets would be limited, Herbosa said. “It would be totally a different story if the failure is in the context of the incumbent perceived to be wanting to stay in power,” he said.

Concerns that President Gloria Macapagal Arroyo might try to hang on to power beyond the constitutional limits of her term have unsettled markets at times over the past year. Most analysts believe it highly unlikely that she would seek to exploit any problem with the elections to remain in office, however.

Arroyo says that she shares concerns that the May 10 polls could face problems. Asked by a group of foreign correspondents over dinner at the presidential palace last week if she was worried about the possible failure of the polls, she replied: “Yes”. “It’s something that has never been tested,” Arroyo said of the computerised tally. “It might fail in some areas, but not in a national scale.”

Reuters