How Trump policies could hit SA economy

Cape Town - The Trump win ushers in a fresh set of uncertainties into a world already reeling from the Brexit vote, political analyst Daniel Silke told Fin24 on Wednesday.

"The policy uncertainty in the UK and possibly effects in Europe are now augmented by policy uncertainty in the US. The political centre – whether left- or right-wing - is now seriously being challenged by more populist and nationalistic tendencies in Western countries and this can have serious implications for trade between the US and the developing world," said Silke.

"In SA’s case the Agoa (African Growth and Opportunity Act) trade agreement, which was already difficult to renegotiate under the Obama presidency, could possibly be even more problematic with Trump in the White House."

Agoa gives preferential treatment to 39 African countries by waiving import levies on more than 7 000 wide-ranging products.

Trump stated his intention to protect US domestic business and manufacturing from threats abroad. This can inevitably impact on the future of Agoa and could result in added import duties being placed on SA exports into the US market as Trump seeks to protect and reciprocate the vote that he has received, especially in the agribusiness sector.

"The second issue from an SA point of view is that a broadly more protectionist US can also negatively impact sentiment towards a basket of emerging market economies. Mexico certainly will feel the initial brunt of the political change, but the good news for SA is that we do not have nearly the same exposure to offshoring as Mexico does," said Silke.

"Still, with a powerful trading partner like the US focusing more inwardly, its role in investing in emerging markets through FDI may well come under pressure in a Trump administration."

While the Mexican peso has borne the brunt of the early reaction to his victory, the fact that SA is geographically relatively isolated may affect the rand moderately but domestic political factors are more likely to move the currency in the medium term, believes Silke.

"Of additional concern to SA is Trump's historic critiques and sometimes even animosity towards governance in SA and we will need to watch carefully if this plays itself out in a changing foreign policy relationship with SA in the near future," said Silke.

"The broad point to make - if a Trump presidency is seen in a highly negative light from a global perspective - is that anything which dampens the US economy will have a knock-on effect across the world, and clearly to us here as well."

Tumisho Grater, economic strategist at Novare, also said that after the markets were caught off-guard by the Brexit vote, a Trump victory is perceived as a second strike for populism.

"There is a lot of pressure on the globalisation status quo, and because the transition to increased global trade was not efficiently managed, it contributed to a large structural displacement of labour and growing inequality. This popular discontent with wage growth, income growth and job loss has changed the political landscape," said Grater.

"There will be a big focus on the policy agenda under the Trump administration and the most obvious issue for emerging markets is trade, as Trump has vowed to renegotiate the North American Free Trade Agreement (Nafta). We do, however, still wait to see more details on policy implementation given that his campaign was light on specifics."

Even with a Republican House and Senate, it is difficult to see what form future polices may take, Grater pointed out. In his view, it is worth mentioning that the president does have the authority to unilaterally pull out of Nafta, which could see trading relations revert to pre-treaty norms.

"In terms of market reaction, it was in line with expectations. A Trump victory has injected considerable uncertainty and volatility into the market. So far reaction has been swift, with a selloff already observed in risky assets," said Grater.

"US equity futures are down sharply (and) the JSE All-share index was down over 2% in the first few minutes of trade. In terms of currency moves, the Mexican peso - which has widely been regarded as a proxy for Donald Trump’s chances - lost over 10% of its value against the greenback. The rand was not unscathed as the local unit came under pressure."

According to Grater, emerging market currencies will once again face some turbulence, which may severely dent the return profile of local-currency bonds.

"The market uncertainty has led to a rush into safe haven buying, as gold surged over 5%. However, on the whole the markets’ initial reaction to Donald Trump’s surprise victory was not received as negatively as the Brexit vote," said Grater.