From both a political and economical point of view, the entire world is at a crossroad. The surprising win of president-elect Donald Trump, the United Kingdom moving further with Brexit, and a potential dissolution of the European Union. Overall, a growing concern related to emerging market devaluation. This may completely change the global landscape in the years to come.
Fear has struck hard in the hearts of financial analysts at the end of 2016. Pessimists were foreseeing an imminent “meltdown” of weaker economies throughout the world. This, they said, would be a consequence of President Trump’s views and policies regarding free trading and increased tariffs on imports. On the other side of the world, the slow economic growth of the European countries, the British referendum, and the political turmoil in countries such as Turkey or Romania paint the future in grim colors. But are things as bad as they look? Is the emerging market devaluation a sure thing or can we expect more positive outcomes to occur?
Trump’s Trade Policies and the Butterfly Effect
During the campaign, Donald Trump expressed his intentions on altering the current global trade mechanisms:
- Proposed 35% tariff on imports from Mexico.
- Proposed 45% tariff on imports from China.
- Altering the existing free trade agreements including reevaluation and renegotiation.
- A threatening withdrawal from the WTO.
- A potential application of company-specific tariffs on products produced in Mexico by US companies.
- An imposition of a 20% border tax
- A reduction of the corporate tax rate in the U.S.
Such initiatives have thrown the country and the world in an endless debate and a deep feeling of uncertainty. This all impacting emerging markets the most. Developing countries and emerging economies are the most sensitive to trading alterations as well as to currency fluctuations. Today, we know the dollar will gain even more strength. Obviously, this inadvertently impacts countries trying to grow.
Things started to take a dangerous route even since the election week. After the outcome, the U.S. 10-year Treasury yield climbed above 2 percent from below 1.8 percent. This led to the Indonesian rupiah’s fall by 3% against the dollar right after the election’s result, with the declines extending the following week. In Malaysia, the ringgit also fell to its lowest point against the dollar since late 2015. Without succumbing to panic, analysts say such occurrences are only natural after any U.S. presidential election. They said that markets, currencies, and global economic parameters would get back on track soon. But have they?
Is Emerging Market Devaluation Stabilizing after the Election?
Recent reports show that emerging markets are currently in a mix of high uncertainty and slow economic growth which won’t be beneficial for the long term. After years of a long and deep economic recession, Brazil is getting up on its feet. For the first time in several years, economic growth is expected for 2017.
Latin America is probably one of the largest group of emerging markets in the world. Still, almost all countries on the continent suffer from severe economic deterioration. Their inflation rates are beyond anyone’s imagination. Social and political turmoil is sustained by emerging poverty rates, increasing violence, and political instability.
The dollar is becoming even more overvalued than it was before. This threatens Latin America to put its problems behind at an even slower pace. The weaker stock market triggered by currency trading imbalances and wider credit spreads can affect the entire continent.
In support of this conclusion, we should also learn from history. The last time the JP Morgan US Nominal Broad Effective Exchange Rate was as strong as it is today, the Argentinian, the Brazilian and the Turkish emerging market devaluation rates were staggering. Some analysts deemed the now-stronger dollar as “toxic” for emerging markets.
State of the World and Trump’s Contributions to Emerging Market Devaluation
Russia is still suffering the effects of the EU sanctions imposed in 2014. Still, there are hopes to recover if President Trump so desires to make some interventions. However, things don’t look bright for Russia. Even if it registered a modest recovery in the oil price as of late because the same Trump trade policies can determine the Russian oil price to fall back. This deepens Russia’s true problems: poor business structures and very poor demographic projections.
Europe and the EU are also facing some hard days ahead. The United Kingdom is on its way to leave the Union. This puts a lot of pressure not only upon the Union. It furthermore stresses the emerging markets in Central and South-Eastern European countries. A weaker pound mixed with a stronger dollar and a politically uncertain Eurozone don’t just impact trades and the internal European markets’ dynamics, but the individuals themselves.
Inflation, bank credits’ interests going through the roof, the rising rates of unemployment in the under 25 years old age groups in Southern Europe are all bad signs. Signs that the current Trump policy will have a direct contribution to the emerging market devaluation. Trump also proposed changes to the free-trade agreements. He has well documented views on immigration. His foreign policy is complicated, as is his position on NATO (regarding honoring the Article 5 of NATO’s charter). If we see these as a whole, things can get very ugly, very fast.
Is There Reason for Hope?
The global landscape seems to be volatile from a political and economical point of view. Interestingly enough, analysts say the world and emerging markets might actually witness economic stability and growth in the next years.
There is a growing focus on at least two emerging markets that play a quintessential role in the global economic dynamics.
On one hand, there is India, a growing financial power and one of the fastest growing emerging markets in the world. The higher levels of a well-educated population are growing rapidly. There’s also a constant struggle to succeed in pursuing the course of liberalization it embarked upon a long time ago. As such, India seems to have little to be concerned about in the future.
Secondly, Turkey, one of the most important geopolitical pawn for both EU and the US will not likely loose its financial support. Even if it is currently ranked as “junk”, finances continue to flow. The country’s weak balance of payments mixed with a high current account deficit and its internal political instability seem to have no real effect.
As other emerging markets are concerned, from Asia to Southern and Eastern Europe and Latin America, experts are rather optimistic in their predictions. Of course, there is a pre-condition for emerging markets and the world to move along with their growth plans and that is Trump’s more tempered policies and reactions in the nearest future.
If he finds the balance between his views on tradings, tariffs, foreign policies and so on, analysts expect that emerging markets to be able to handle the gradual sharp increase in US interest rates hikes. Also, due to Trump’s intention to revive the capital spending in the United States may provide a demand boost to the emerging markets.
The good news is that if Trump finds balance and begins a more moderate world change, the emerging markets devaluation may be slow if not absent. The GDP growth premium maintained by emerging economies over the more stable, developed countries is expected to increase in the next few years, provided Trump’s pursue of an isolationist policy becomes more pragmatic and strategic. In case Trump’s moves start to be led more by reason and less by sentiment, the general oppinion is that his policies might actually lead to a sustained and healthy U.S. growth and clearly better prospects for the emerging markets.
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