Trump is making emerging markets great again

Against all the odds at the start of his administration, President Donald Trump has proved to be good for the emerging market economies. That is, at least, up until now.

Rather than having any success in implementing his economic program that might have boosted investor confidence and caused capital to return home, President Trump’s many political blunders have kept capital flowing to the emerging market economies. 

{mosads}Capital has kept flowing as confidence in the U.S. economy has waned and as investors have continued to stretch for yield in a low global interest rate environment.

At the start of this year, there were many reasons for the large emerging market economies to be fearful of a Trump administration. A proposed policy of large unfunded tax cuts and big increases in infrastructure spending were thought almost certain to widen the U.S. budget deficit and cause the U.S. economy to overheat.

That was feared likely to force the Federal Reserve soon to have to tighten monetary policy to prevent inflation, which would in turn attract capital back home and propel the U.S. dollar to ever higher levels. 

It was also feared, especially by China and Mexico, that the Trump administration would veer sharply toward a highly protectionist international trade policy that would put an end to their export-led economic growth. After all, attacking globalization was a principal theme of President Trump’s electoral campaign.

He also made many promises on the campaign trail to go after currency manipulators, to level the international trade playing field to the United States’ advantage and to tear up bilateral trade agreements like NAFTA.

To date, the Trump administration has spectacularly failed to deliver on its economic agenda. Seriously sidetracked by its failed attempt to overhaul ObamaCare, the promised program of fundamental tax reform and infrastructural spending increases were put on the backburner.

Worse yet for the president, there are now growing doubts as to whether he still has the political capital to get his budget proposals adopted by a deeply divided Congress.

Meanwhile, President Trump’s bark has proved to be very much worse than his bite on the matter of leveling the international trade playing field in America’s favor. To be sure, the Trump administration has refused to subscribe to the G-20 countries’ pledge not to intensify trade protection. However, China has yet to be labeled a currency manipulator, and NAFTA is yet to be torn up as promised.

A struggling US dollar is proving a blessing for emerging markets – but there’s no room for complacency. Watch at https://t.co/Ez9F5erIQs pic.twitter.com/vAcDmE5L9b

— UBS (@UBS) September 12, 2017

The net upshot of President Trump’s failure to advance his economic agenda has been to delay the need for further Federal Reserve rate increases. It has also undermined foreign investor confidence in the U.S. economy, which together with reduced expectations about further Fed rate increases, has led to a major slump in the U.S. dollar.

Since January 2017, despite the fact that there has been an intensification in geopolitical tension that normally would have supported the dollar, the dollar has managed to lose more than 10 percent of its value. 

If there are two things that the emerging market economies welcome, they are low U.S. interest rates and a weak dollar.

Low U.S. interest rates generally keeps capital flowing to the emerging markets as investors are forced to stretch for yield abroad. At the same time, a weak dollar generally has the effect of boosting international commodity prices which are a boon to those commodity-dependent emerging market economies.

On Wall Street, it is often said that when the winds are strong even turkeys fly. This might explain why in today’s global environment of low interest rates and a weak dollar, emerging market countries like Brazil, South Africa and Turkey can still access the global capital market on good terms, and they can do so despite their ever-more shaky economic and political fundamentals.

It also might explain why a country like Argentina can place a 100-year bond on good terms, as it recently did, despite the fact that it has defaulted no fewer than five times over the past 100 years, or why even war-torn Iraq manages to have its recent bond placement four-times over-subscribed.

Policymakers in the emerging market countries would be making a big mistake to think that these favorable global financial market conditions will continue indefinitely. Instead, they should be taking advantage now of the window that these favorable conditions afford them to prepare for the rainy days that might lie ahead.

They should do so by addressing those economic weaknesses and imbalances that continue to make them all too vulnerable to any drying up in global liquidity. 

Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.