US poll could help emerg­ing mar­kets

Set­back for Trump may of­fer a re­prieve from iso­la­tion­ism

Sunday Times - - Business The Big Read - By MUDIWA GAVAZA

● Donald Trump’s first two years as US pres­i­dent have to a large ex­tent been an un­re­strained reign. For emerg­ing-mar­ket economies such as SA’s, this week’s midterm elec­tions would de­ter­mine whether he would have checks and bal­ances im­posed on a pres­i­dency that has pushed for in­creased pro­tec­tion­ism and trade wars; or whether he would get greater li­cence to pur­sue his “Make Amer­ica Great Again” strat­egy, which has proved iso­la­tion­ist.

While Trump has been quick to pro­claim a vic­tory for his Repub­li­can party, as it in­creased con­trol of the Se­nate, the party lost con­trol of the House of Rep­re­sen­ta­tives to the Democrats.

The loss “will be per­ceived to al­low for ad­di­tional checks and bal­ances on Pres­i­dent Trump”, US-based econ­o­mists Mickey Levy and Roiana Reid of Beren­berg Cap­i­tal Mar­kets told Busi­ness Times. The rand is the most liq­uid of emerg­ing-mar­ket cur­ren­cies and ral­lied on the out­come of the polls, break­ing through the R14/$ mark for the first time since Au­gust.

Trump and his base of sup­port­ers are largely against free trade. Through his colour­ful brand of “diplo­macy”, he has caused ten­sions around the world with old en­e­mies and tra­di­tional trad­ing part­ners, par­tic­u­larly China.

This has stoked fears of a trade war, where coun­tries or re­gions use rounds of trade pol­icy to in­flict eco­nomic harm on each other.

Fears over a trade war and ris­ing in­ter­est rates in the US have fed into global un­cer­tain­ties around growth, which have fed into weak eq­uity mar­kets. Lon­don’s FTSE 100 is about 12% off its high for this year, while the JSE All Share is more alarm­ingly 18% off its Jan­uary highs.

Among a host of is­sues, the US wants China to trim its trade sur­plus and to change the way it deals with US in­tel­lec­tual prop­erty. China wants the US to drop its tar­iff threats and ease bans on cell­phone-mak­ers ZTE and Huawei.

Emerg­ing mar­kets have par­tic­u­larly felt the brunt of this ag­gres­sion be­tween the two largest global economies.

Trump “has been ac­tive in es­ca­lat­ing USChina trade ten­sions by in­sti­tut­ing tar­iffs and so fears of slower global growth en­sued — re­sult­ing in ris­ing mar­ket risk aver­sion, which has trans­lated into some cur­rency weak­ness for emerg­ing mar­kets”, says In­vestec econ­o­mist Annabel Bishop.

When the world sneezes, SA is like that per­son left with a soggy shirt sleeve be­cause they were stand­ing too close. That is the na­ture of op­er­at­ing an open econ­omy that ag­gres­sively trades with the rest of the world.

About 41% of rand-de­nom­i­nated bonds are for­eign held, and as such the econ­omy is sus­cep­ti­ble to move­ments and shocks in global mar­kets. This pro­por­tion of for­eignowned bonds is the high­est among the emerg­ing-mar­ket na­tions.

When Trump won the pres­i­dency two years ago, emerg­ing-mar­ket na­tions ini­tially ben­e­fited from the con­fu­sion stoked by his vic­tory. No-one was sure how se­ri­ous he’d be about im­ple­ment­ing his rad­i­cal cam­paign prom­ises.

De­spite the in­tro­duc­tion of some lev­els of ac­count­abil­ity to the White House af­ter this week’s polls, econ­o­mists still ex­pect Trump to beat the drums of trade war.

“Trump’s ap­proach to trade poli­cies will re­main un­changed, par­tic­u­larly his brassknuckle ne­go­ti­at­ing tac­tics with China,” said Levy and Reid.

The re­al­ity of the elec­tion results is that Trump and the Repub­li­cans have not been fully neu­tralised. As they still con­trol the Se­nate, they are likely to make use of their veto power and ex­ec­u­tive or­ders to drive their pol­icy agenda. Their po­si­tion on trade is un­likely to change, with some Democrats ac­tu­ally be­ing in sup­port of the an­tifree-trade agenda.

The US says that Amer­i­can jobs are be­ing ex­ported to China, as the world’s sec­ond­biggest econ­omy still re­lies on its ex­ports to keep its vast pop­u­lace em­ployed and to en­sure it main­tains high growth rates.

The most valu­able US com­pany, Ap­ple, with a mar­ket valu­a­tion above $1-tril­lion, man­u­fac­tures its prod­ucts in China. On the back of an iPhone, it reads: “De­signed by Ap­ple in Cal­i­for­nia. As­sem­bled in China.”

Dur­ing his pres­i­dency, Trump has in­tro­duced tar­iffs amount­ing to bil­lions of dol­lars on Chi­nese goods.

How­ever, th­ese pro­tec­tion­ist mea­sures have hurt a num­ber of his sup­port­ers, such as soy­bean farm­ers who have seen the price of their pro­duce rise by 25%, mak­ing it less at­trac­tive on the world mar­ket.

The US’s at­ti­tude to China is in­dica­tive of its at­ti­tude to emerg­ing mar­kets as a whole, in­clud­ing SA, which trades heav­ily with both eco­nomic su­per­pow­ers, par­tic­u­larly China.

Es­ca­lat­ing trade ten­sions, which are al­ready feed­ing into slow­ing growth rates in China, will have a se­vere im­pact on com­mod­ity prices such as gold, plat­inum and cop­per.

The SA-China re­la­tion­ship is an im­por­tant eco­nomic life­line for SA, with bi­lat­eral trade be­tween the two na­tions reach­ing around $40bn last year.

SA is al­ready at risk of be­ing down­graded by Moody’s af­ter fi­nance min­is­ter Tito Mboweni’s in­au­gu­ral mid-term bud­get in Oc­to­ber. The rat­ings agency is­sued a warn­ing that SA, like Turkey, Ar­gentina and Brazil, faced height­ened geopo­lit­i­cal risks.

Trump has been ac­tive in es­ca­lat­ing US-China trade ten­sions

Annabel Bishop

In­vestec econ­o­mist

Pic­ture: Al Drago/Bloomberg via Getty Im­ages

US Pres­i­dent Donald Trump de­parts af­ter a news con­fer­ence at the White House on Wed­nes­day.

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