Recovery on Thin Ice with Trump’s Presidency

Author: Sutapa Amornvivat, Ph.D.

Published in Bangkok Post newspaper / In Ponderland column 23 November 2016

Trump’s win may derail the long journey of global recovery. This seismic shift in the political landscape stems from an internal economic root cause and likely extends into dire economic consequences globally, especially for emerging markets like Thailand. After much inconsistency in Trump’s presidential campaign, his team that will be unveiled over the next few weeks will be critical for global outlook next year. It seems we will be “kept in suspense” into Christmas.

Years of slow growth since the financial crisis feed into public frustration especially among the lower- and middle-income classes. Tools employed to aid the recovery like QE and low interest policies have been considered as unfairly benefiting the rich. In a way, the stunning victory of a political outsider, Donald Trump, reflects a revolt of the “forgotten” US middleclass against globalization—forces that supposedly ship their jobs abroad and bring terrorism threats to their front doors.

Trump’s win and the Brexit vote both represent the rise of anti-establishment populism around the world. Going into 2017, a line-up of political events in Europe contains similar risks.  France could be next to see yet another surprise in its May election. Marine Le Pen, the leader of the National Front Party, has been riding the same wave as Trump and the Brexiteers through her anti-immigration and anti-free-trade policies. These events, previously regarded as low-probability-high-impact, went largely undetected by polls. Such surprising nature casts a cloud of uncertainty over the global outlook, adding risks to the geopolitical and financial landscapes.

In the short-run, impact can already be observed in a financial market panic that transpired as soon as partial election results came out. Investors were selling off risky assets like stocks in favor of something safer such as government bonds and safe-haven currencies. This was a Brexit Déjà vu all over again. Although the panic quickly subsided upon hearing Trump’s acceptance speech, the global financial markets are now hyper-sensitive to every little move he makes. Given Trump’s track record, it is hard to imagine that his temper will be always kept in check throughout his time in office. We’ll likely see more of risk-off episodes in the near future. For Thailand, the immediate impact has been more muted partly because Thai assets had been underweighted by global investors for several years.

In the medium term, Trump’s unclear and often-contradicting policies and his unpredictable character make it difficult to even establish a realistic worst-case scenario. Uncertainty like this hampers business investments. Case in point is UK exporters who record high profit from falling pound. Yet, they do not have plans to invest due to Brexit uncertainty.

Trump’s “America First” approach on trade could mean a major blow to already ailing global trade. Wall-street bankers and business moguls populated his campaign’s economic advisor team. Interestingly, the only academic, Peter Navarro, is one of the few economists who blame China and free trade as the main culprit for slow growth and Americans’ job loss. Another member of Trump’s team and also the front runner for the Commerce post is Wilbur Ross, a long-time critic of NAFTA and free trade agreements.

These people do not necessarily oppose trade, but call for one that will put America first. Such entails countervailing tariffs and punishment for American companies that open factories abroad, even though American consumers could benefit from cheaper products from comparative advantage. This comes as bad news for developing nations—Thailand included—which still rely on trade for growth.

Policy uncertainty in the U.S. could shake up the two economic time bombs already in place. Despite being tail risks, they put the possibility of global recession back on the table.

First, a known ticking time bomb is in the European banking sector. This year, we have seen several episodes of big banks like Italy’s Monte Dei Paschi and Germany’s Deutsche Bank on a verge of bankruptcy. The prolonged low interest rates environment hurts banks worldwide; but more so among European banks as they suffer from a bad debt legacy that results from the intertwined link between governments and banks and past fiscal mismanagement. With rising uncertainty, similar events could be triggered again next year as the underlying problems of bad debts have not been solved.

A lesser known time bomb is China’s corporate debts which has become a greater threat with unexpected shifts in the U.S. trade and foreign policies. Since the 2008 crisis, China’s easing credit policies to boost the economy creates a side effect of debt accumulation. China’s non-financial corporate debt rose from 99% of GDP in 2008 to 171% in 2015, while corporate profitability has been falling. The IMF estimates that corporate debt among companies with low repayment ability accounts for 14% of total borrowings despite a low NPL number. This debt-at-risk concentrates in real estate. Thus, a series of defaults could potentially bring down the overheated property market triggering a crash-landing of the Chinese economy.

The suggestion that Trump will be tough on China amplifies fears that this time bomb could go off. Since the US Election Day, the RMB has fallen sharply to its 8-year low against US dollar. The pace was quickened by a torrent of capital outflows from China in anticipation of Trump’s policies that will raise inflation and long-term bond yields in the US. Despite previous efforts to resist this trend, the possibility of Trump imposing tariffs on Chinese goods makes the decision to weaken the Yuan a bit easier for China. This also shows how Beijing will not budge over Trump’s labeling it as a currency manipulator as he promised to do so pre-election.

For the Thai economy, the aforementioned tail-risks could thwart our recent economic uptick. The unexpected strong GDP number in the first half of the year has been propped up by front-loaded government spending, real estate fee discount, and car sales spikes; most of which are now fleeting. The underlying fundamentals like private investment and household income, on the other hand, remain weak. Some light that shone through recently are 5% growth in exports in August and September after dropping 2% early in the year. Exports to the U.S. and China, which contributed around two fifths of that jump, could now be in jeopardy.

In sum, these developments in the West are not too far removed from our economic well-being in Thailand. Possible scenarios could be as extreme as an all-out trade war between the U.S. and China or a break-up of the European Union. In the coming weeks, Trump’s Cabinet picks will provide a more coherent picture and shed some light on whether we should brace ourselves for a paradigm shift in global trade and geopolitical order.