Every region of the world has reason for caution under Donald Trump’s presidency, from the risk of reduced trade and remittances in Latin America to a shifting in the US-Russia axis. While the challenges for Mexico are the most immediately apparent, Exotix Partners gives an A to Z of some other key markets to watch.
Expect to see increased risk aversion under a Trump presidency, initially resulting in higher spreads in emerging market external debt, especially for more volatile credits like Argentina.
That said, the potentially more dovish path for US interest rates, relative to what might have been the case under Hillary Clinton, means Argentina, as with other markets, won’t face higher borrowing costs – crucial at a time in which it’s relying increasingly on international funding.
A weaker US dollar is also positive for Argentina in that it translates into stronger commodity prices. But at the same time, this might pose a challenge for the central bank as it tries to bring inflation down and fight the upward real appreciation pressure that the peso has been experiencing.
Argentina is unlikely to be of much importance from a US foreign policy perspective or bilateral relations. Once the short-term effects of the US elections pass, expect investors to retain their focus on country-specific factors entering into 2017: mid-term elections, progress on the inflation-targeting program and, importantly, the pace of improvement in the fiscal situation.
The more dovish monetary policy anticipated under Trump’s presidency is only marginally positive for Brazil’s government, given the low amount of sovereign dollar debt relative to GDP. But lower US rates will have significant impact on the corporate sector, which has borrowed offshore and will need to refinance.
A weaker US dollar could hurt the country’s industrial exports but it’s positive for Brazil’s state oil company, Petrobras. Stronger commodities are positive for the country’s exports and economic activity.
Trump’s win raises the risk of increased trade restrictions, with the US being Brazil’s second-largest export destination.
With Trump in charge, American support for Iraq could potentially weaken. The benefit of higher commodity prices for Iraq is therefore balanced against the risk of weaker support from America – and potentially from development finance institutions as well.
Given the importance of the next 6-12 months in Iraq’s external financing schedule, the net effect of a Trump win is probably negative for Iraq and its US dollar bonds.
Following the Trump victory, we see little direct impact on valuations in Nigeria. It is not clear that Nigeria will be at the top of the political agenda. Beyond security concerns around Boko Haram, on which the US has provided some assistance, there appears to be less obvious cooperation and trade between the two countries now than there has been in the past.
One clear example of this is oil, which accounts for the vast majority of foreign currency revenues for Nigeria. According to data from the Energy Information Administration, monthly US imports of crude oil and petroleum products from Nigeria fell to just 627,000 barrels in the middle of 2015, from a high of almost 39 million a decade earlier. These oil imports have increased from the lows in recent months but remain significantly below historical levels.
Beyond the generic implications for risk and emerging markets, the political impasse in the country and lingering concerns about the exchange rate are likely to be the bigger determinants of investor appetite for Nigerian bonds and stocks. A rise in oil prices would clearly be positive.
Following the Trump victory, there is likely to be a period of foreign policy uncertainty. This is likely to push Pakistan even closer to China, particularly as the Chinese Pakistan Economic Corridor enters its implementation phase.
At the margin, a shift to reduced US support for freer global trade or immigration has relatively little impact on Pakistan. America’s contribution to remittances is relatively small compared to the GCC, for example.
While Pakistan’s already moribund export performance is likely to suffer further in the event that the rupee strengthens against the US dollar, the investment case ultimately depends on improving domestic security and any resulting recovery in local macroeconomic demand. Policies in advance of the 2018 election will also be key.
Trump’s win opens the possibility of a change in stance on sanctions against Russia. If that does happen, the US will be at odds with the current European Union position, creating potential divisions within the EU that can be exploited by the Kremlin.
A weaker US dollar, higher commodity prices and a more dovish Fed are likely to have a positive effect on Russian assets and the possibility of sanction removal could add to the upside.
Companies with the potential to benefit the most are those currently under sanctions, which include government-linked entities such as Gazprom Neft, Rosneft, VTB, VEB and Sberbank.
Otherwise, a combination of US dollar weakness and commodity (oil) price increases is likely to be neutral overall from the perspective of foreign investors.
Ultimately the Saudi investment case rests on its ability to confront the enormous challenge of structural economic and social transformation.
While higher commodity prices and a weaker US dollar may, initially at least, benefit exporters such as Nigeria, Angola and Zambia, the overall impact of Trump on Sub-Saharan Africa markets is broadly neutral to negative.
There’s no sign that Africa is a foreign policy priority in the same way that it was to President Obama (recall that Obama traveled to Ghana in one of his first international trips in 2009). Market sell-offs on increasing risk aversion might be negative for frontier external debt markets, including higher-yielding African countries, such as Ghana, Zambia and Angola.
Expectations of a more dovish path for US interest rates could help those with big financing plans such as Nigeria, Angola and Ghana. But this is likely to be offset by rising country-risk premiums due to uncertainties over trade policy and threat of protectionism.
Ultimately, investors will turn their attention back to country-specific factors: Ghana’s own presidential election in December and IMF program; Zambia’s potential IMF program; Angola’s macro adjustment; and Kenya’s presidential election, moderation of fiscal policy and the potential negative economic impact of lending rate caps.
Beyond general economic and foreign policy uncertainty, the Trump Presidency raises specific concerns for investors in Ukraine. Trump appears at least to lean more favorably toward Russia than Obama has, and Hillary Clinton might have been expected to. While the foundations of the Trump-Putin “bromance” may be shaky, it adds to foreign policy uncertainty.
Moreover, Trump’s supportive comments about Russia’s annexation of Crimea in particular, and his dismissive approach to NATO in general, may also raise domestic as well as regional concerns.
Ukraine is likely to still enjoy the support of Western European countries, but a weaker US commitment would be negative, and come at a tricky stage of the country’s reform program.
A dovish monetary policy has virtually no direct impact on Venezuela as it has not had market access (at any reasonable interest rate) for years now. But looser rates also lead to a weaker dollar and therefore stronger commodities, with the lift to crude oil prices providing a relief to Venezuela’s pressurized balance of payments.
It’s unclear how bilateral relations might evolve. Intuitively, a Republican administration might be expected to take a tougher stance with Venezuela, but with Trump entertaining some unusual international relationships, nothing can be discarded.
Any indication of a tougher stance that could increase the chances of President Maduro’s ouster would have a positive impact on the bond prices of Venezuela and PDVSA, the state-owned oil and natural gas company, while a perceived easing in relations might have the opposite effect.
With Trump’s victory, the prospects of US ratification of the Trans Pacific Partnership agreement look very poor. Ultimately, though, Vietnam’s low-cost labor, strong domestic law and order, and unfettered sea transit should continue to drive export-led growth and urban, consumptive, population growth.
There should still be sufficient opportunity for export growth by capturing a larger share from higher-cost exporters, such as China, without relying on a major pick up in global trade, let alone tariff reductions. US tariffs are already lower on garments, for example, than those faced by competitors like Bangladesh.
The authors are Exotix Partners analysts and economists: Stuart Culverhouse, Hasnain Malik, Ronak Gadhia, Alan Cameron, Francisco Velasco, Tolu Alamutu and Aleksej Gren