HILARY JOFFE: Trump’s America creates uncertainty for emerging markets

The rand dropped 2% on Wednesday morning as it became clear that Donald Trump would take the US presidency, a “red sweep” that will give him control of all three levers of power. But SA’s currency quickly came back to trade at R17.55 to the dollar a day later.

That’s worse than the lows it reached before markets started to price in the “Trump trade”. But it’s still way better than the high R19/$ range it reached at the height of SA’s own election uncertainty, before the government of national unity (GNU) was formed. And while the Trump news smacked all emerging-market currencies, SA’s has done better than most, outperforming all its Bloomberg peers for the year to date and all but three of them over the past quarter.

How the rand does amid global market turbulence will be a real test of how much store investors put in the GNU story and SA’s chances of turning around its growth and debt outlooks. But there is no doubt that Trump’s America will make for a global environment that will be far more hostile, and far more uncertain, for emerging markets, including SA. Our economic policymakers will have less room for manoeuvre: pushing ahead with reforms will be more urgent than before, as will a more strategic approach to foreign policy.

Much of the attention has been focused on Trump’s impact on trade, and the real economy channels through which his election campaign threats will transmit to the US and the world. For SA the financial economy fallout could be as or more significant, in the near term and in the long term. But there are many question marks.

Higher tariffs

Trump’s promised tax cuts are likely to stimulate an already strong US economy in the short term. The pain could come a bit later — and the US’s pain tends to be externalised to the rest of the world. How much depends on how seriously Trump implements his beloved tariff hikes and how far he goes to expel foreign-born workers.

Imposing tariffs of at least 10% on imports from all countries, and 60% on China, will smack global growth, as the IMF has warned, especially if it invites retaliation from other countries in Europe and Asia and sparks a trade war. Not that protectionism isn’t rising in the world anyway, nor that Trump didn’t do some targeted tariffs his first time round. The fear is this will be more extreme and more conflictual.

Higher tariffs on all imports would make SA and Africa’s duty-free access to US markets under the African Growth & Opportunity Act (Agoa) even more valuable. Only a third of SA’s exports to the US benefit from Agoa, but it’s an important third that includes agriculture and auto. But though the US president would have to sign off on it if the legislation is extended next year, it is Congress that makes the decision, and it’s not yet clear how this will play out after the red sweep.

What is clear is that Trump’s tariffs would be inflationary. This is the big irony given that he campaigned on cutting the cost of living — and previously got lucky through presiding over a stretch of very low inflation and interest rates in his first term, while his successor, Joe Biden, got landed with the high-inflation episode post Covid and post Russia’s invasion of Ukraine. US consumers and businesses will bear the brunt of the extra cost imposed by higher tariffs on imports to the US.

Fewer cuts

Added to that is the impact on prices if he goes ahead with his threat to deport up to 8-million migrant workers, which will make an already tight US labour market even tighter, pushing up wages. The tax stimulus will also add to demand in an already overheated economy so could fuel inflation further, with the US fiscal deficit likely to balloon. The Peterson Institute for International Economics has estimated US inflation could rise to 6%-9% by 2026 in a full-on Trump scenario, against a baseline forecast of 1.9%.

Higher inflation may not mean the US Federal Reserve goes back to hiking interest rates, but it certainly indicates fewer rate cuts. And if the Fed is cutting less there’s less room for emerging markets to cut, which in our case suggests higher-for-longer rates and less cyclical growth stimulus.

Higher US rates mean a stronger dollar (as we’ve already seen), which puts pressure on emerging-market currencies and generally makes global financial conditions tighter, because investors have less appetite to buy risky assets (which weighs on commodity prices too). Even more directly, looser US fiscal policy means more borrowing and more risk, which drives up US treasury yields, which in turn drives up long bond yields for emerging markets because these are priced off US treasuries, making it more costly for government to borrow.

All of that could be in the relatively short term. What of the long term? A big question mark is how far Trump will go to erode the independence of US institutions such as the courts and of the state more generally. He wants to get rid of, or get control of, bureaucrats who oppose him and is expected — embarrassingly for SA — to put Elon Musk in charge of doing the dirty work.

Specifically for the economy, he wants to call the shots at the Fed. That’s likely to be bad for inflation, but its long-term outcomes could be more quirky. Will a compromised Fed mean the dollar loses some of its status as the world’s reserve currency? Will it cause capital to flow to countries seen as safer and less exposed to the US? The Peterson Institute argued in a recent paper that it could, with a full-on Trump scenario reducing growth in the US, Mexico and China by the end of Trump’s term in 2029 but increasing it in 21 other countries — including SA, the growth of which could be boosted by 0.3 to 0.5 of a percentage point.

One last crucial channel by which Trumpism will transmit to the global economy is his isolationism, which would be a lot worse if vice-president-elect JD Vance ended up taking over at some point, for whatever reason. Their hostility to multilateral institutions such as the IMF, UN and Nato is a risk to the world, developing countries in particular. All of which will make SA’s hosting of the Group of 20 (G20) in a year more risky, and more intriguing. Will Trump come to SA for the G20 leaders summit? And if he does, will he bring his friend Vladimir Putin? We are in for an uncertain and potentially terrifying time.

• Joffe is editor-at-large.