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How Trump policies could impact emerging markets

early indications are that the divisive rhetoric and extremist positions of the political campaign are being significantly tempered.

WASHINGTON: One early effect of Donald Trump’s economic programme could be a boost in commodity prices and more rapid economic growth.

Incoming Republican Senator Rand Paul from the coal-producing state of Kentucky, says the new administration’s first order of business will be to lift burdensome regulations on business. Speaking on MSNBC television, Paul said: “We’re going to repeal a half-dozen or more regulations in the first week of congress.”

He added that environmental and labour regulations have cost thousands of US jobs.

Beyond rolling back regulations, analysts anticipate fiscal stimulus – particularly increased spending to modernise infrastructure. Investor Marc Faber, author of the Hong Kong-based ‘Gloom, Boom and Doom Report’, says “Within the stock market…anything that is commodity-related will do well.”

Faber also expects Russian and Kazakhstan assets to do well in the first months of the Trump administration, “for the simple reason that Trump has a more benign view of the world and respects the perspective [of] foreign leaders.”

But despite the unexpected stock market rally that followed the Trump victory, there are huge uncertainties surrounding his economic programme, particularly trade.

During Thursday’s first-ever (90-minute) meeting between Trump and President Obama at the White House, there was almost certainly discussion of their opposing views on trade. Obama is pushing for a congressional vote in December on the Trans-Pacific Partnership (TPP) – a far-reaching trade expansion deal involving the United States and 11 Pacific Rim economies.

Trump is dead set against TPP, calling it a terrible agreement that would cost thousands of jobs and undermine the US economy. Kevin Nealer, a trade expert at Washington’s Center for Strategic and International Studies, says: “Prospects of action on TPP in the lame duck session of Congress are near zero.” Faber agrees.

In addition to opposing TPP, Trump advocates a 45% tariff on goods coming into the States from China and wants Beijing labeled a ‘currency manipulator’ for holding down the value of its currency, the renminbi.

Several trade specialists say Trump’s policies are overtly protectionist and, if implemented, would trigger a trade war. Washington’s Peterson Institute for International Economics says Trump’s trade programme is disastrous and would likely push the US economy into recession and eliminate five million American jobs.

What about Africa?

During the campaign Trump said very little about Africa. One thing is sure, the Trump administration is unlikely to tamper with the African Growth and Opportunity Act (Agoa), that Congress last year extended for a further ten years. Agoa allows African products to enter the US market duty free. SA, and particularly its motor industry, is the biggest beneficiary of Agoa.

Of critical importance to SA is the US Federal Reserve interest rate policy. The Fed wants to normalise rates that have been held at artificially low levels since the great recession of 2008. Trump has been critical of the central bank, saying in a debate with Hillary Clinton that Fed chairman Janet Yellen “is very political and should be ashamed of herself,” for not moving faster on rates. Fed inaction, said Trump, had created “a big, fat, ugly bubble” in equity markets.  

The Fed enjoys statutory independence from the executive branch, although the president nominates the chairman and board of governors who are then approved by the senate. There are currently two vacancies on the board. Yellen is in the middle of a four-year term that runs until February 2018. Analysts say Trump is unlikely to pick a fight with her or ask for her resignation.

When the Fed under previous chairman Ben Bernanke, said in 2013 that it would scale back its bond-buying programme, the so-called ‘taper tantrum’ sent equity and emerging market currencies tumbling. In most cases currencies including the rand have not returned to May 2013 levels.

At last month’s International Monetary Fund annual meeting in Washington, South African Reserve Bank governor Lesetja Kganyago said SA is well prepared for a Fed rate increase, as its reserves are at a high level. He commended the Fed for communicating often and effectively on its interest rate plans.

It is widely anticipated that the Fed will raise the short-term rate by a quarter of 1% at its early December meeting – its last before president-elect Trump takes office on January 20.

In sum, very little is known about the specifics of what president-elect Trump will actually do once he takes office. However, early indications are that the divisive rhetoric and extremist positions of the political campaign are being significantly tempered.

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