It’s President Trump. What’s next for emerging markets?

President Trump

Populist/nationalist sentiment has shocked the establishment in one of the world’s great democracies. White working-class, rural, and suburban voters expressed deep disaffection from America’s elites by turning out in force to support Donald Trump, a businessman with no previous government experience. With this election, the United States follows the path of Brexit and the trend toward backlash-driven volatility in government policy that FSG warned of in our Events to Watch in 2016 report last fall.

Donald Trump’s combative personality and thin policy knowledge will make him the most unpredictable president in American history. He comes to office owing nothing to the political establishment of either party. Indeed, much of Trump’s base propelled him to the presidency as a rebuke to the Republican party establishment as much as it was a repudiation of the Democratic party.

Although the Republican party controls the House and Senate and will soon establish a conservative majority on the Supreme Court, its internal factions will battle over priorities and ideology in Congress and likely within the new Administration itself. Taxes will be lowered and regulations will be reduced, but much else will require intense negotiation. The primary political question at this point is whether we will see our “Trump in Charge” scenario or the “Trump in Conflict” scenario in executive-legislative relations.

President Donald Trump may emphasize the more extreme views he voiced during the campaign, or shift to a more consistently moderate governing style. Regardless, Trump will be extremely disruptive in domestic policy given that some supporters expect him to overturn a number of established elements of the American social contract while others hope he will govern as a conventional Republican. Foreign relations will be fraught given Trump’s aversion to some longstanding aspects of America’s global leadership and the reluctance of many experienced foreign policy officials to serve under him. Confusion will reign in the media and among the world’s elites for weeks to come.

As we outlined in our recent Global Outlook for 2017, emerging-market economies face greater risk from the ripple effects of politics in developed markets than from their own domestic missteps. Changes in trade, financial flows, currency volatility, and migration can be more disruptive than any misjudgments — and overwhelm the accomplishments — of local leaders.

Donald Trump may be unpredictable, but he has consistently articulated several positions that will have powerful effects on the business environment in emerging markets in the coming years. This much we know now:

TRADE

Donald Trump has pledged to not ratify the Trans-Pacific Partnership (TPP) with Asia and Latin America and Transatlantic Trade and Investment Partnership (TTIP) with Europe. There is no chance of TPP being passed before Trump takes office. A deeper slowdown in global trade would reduce the pace of global economic growth, with smaller export-dependent emerging markets feeling the greatest impact.

China may face tariff increases from President Trump, even as it pursues its own bilateral trade deals and regional agreements that enshrine more amenable rule sets to China, like the Regional Comprehensive Economic Partnership (RCEP). Mexico faces particular risk if President Trump follows through on his threats to exit the 20-year-old NAFTA accord entirely, which will be technically within his power. That said, Trump may well pursue bilateral trade deals that could boost particular sectors of specific countries over the longer term.

IMMIGRATION

Trump has vowed to roll back President Obama’s executive orders protecting certain groups of immigrants. In the short term, the Trump administration will focus on enforcement measures to identify and deport illegal immigrants, and moving to limit immigration from Muslim countries. In the longer term, Trump will attempt to boost border security with a physical wall along the southern border.

Mexico and Central America will face the brunt of economic impact. Ramped-up enforcement will push many of their citizens resident in the US without having legally immigrated to return — some voluntarily, some not. This will reduce remittance flows and could result in increased unemployment.

SECURITY ALLIANCES

Donald Trump has not expressed a commitment to maintain the military alliances that have supported a half-century of security and, indirectly, a foundation for peaceful economic development across Europe, Asia, and Latin America. Headlines have focused on Trump’s supposed friendliness to Vladimir Putin and potentially pulling back from NATO as a bulwark from Russia expanding its sphere of influence in Eastern Europe.

Trump’s approach to the Middle East is even more uncertain, as new Presidents are often forced by that events in that region to take action even they did not expect. Iran in particular will likely take center stage as President Obama’s nuclear sanctions deal is revisited, likely causing oil-price volatility.

Potentially more worrisome is the possibility that Asian allies will seek a more reliable partner in China, as the Philippines’ President Duterte has already done, or that they will spark a regional arms race under the assumption that they can count on no one but themselves for their own defense, as Japan may do. Setting aside the rising potential for conflict, the likelihood of widespread diversion of government spending from economic development and social services to military build-up is real.

INFRASTRUCTURE SPENDING

One potential silver lining for the American economy — which is itself an important source of demand for emerging-market exports — is the potential for a Republican Congress to support President Trump’s call for major investments in rebuilding America’s decaying infrastructure. Trump’s campaign promises for infrastructure spending would improve long-term productivity while providing a medium-term boost to economic activity and employment.

Much raw material and equipment would be imported, regardless of Trump’s rhetoric about trade policy, and economic stimulus in the US would have positive ripples to its trading partners generally. The long-term concern about this policy is that it is quite likely to be funded by debt rather than taxes, further undermining the financial sustainability of the US government, but those consequences would likely be left for a subsequent President to manage.

FINANCIAL VOLATILITY

The economic disruptions that emerging markets have experienced during the recent strong-dollar period will likely pale in comparison to the volatility they will experience going forward.

Trump’s penchant for unscripted comments about topics that the American political class has come to discuss in tightly managed code, coupled with his unparalleled ability to dominate the news cycle, almost guarantees constant market reaction to his every utterance.

Given greater uncertainty, the Federal Reserve is likely to delay an interest rate increase beyond the December timing many (including FSG) expected, challenging the FX assumptions underlying many companies’ 2017 strategic plans. When Janet Yellen’s term ends in 2018, President Trump will likely attempt to limit the independence of the Federal Reserve, potentially diminishing confidence in the US dollar’s distinctive role as a safe-haven currency.

The Mexican peso will be a particular target of traders given the multiple Trump policies that target Mexico, as has been demonstrated throughout the campaign given the tight correlation between the peso and Donald Trump’s polling levels.

At FSG, a core element of our research methodology is to regularly evaluate the linkages between markets as a basis for adjusting our economic forecasts and business outlooks. Now more than ever, the United States under President Trump will be a driver of uncertainty as much as it is an engine of growth. We will continue to track events closely and give you the tools and advice to monitor and plan for all of your key markets.

Please contact your client relationship director for assistance in recalibrating your business plans and gaining alignment within your leadership teams as Donald Trump prepares to assume the American presidency.


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