There is a high probability of a “clean sweep” by the
Republican Party (it is likely to take control of both the US Senate and
House), which will give Trump greater ability to execute his campaign pledges.
Trump’s policies – cracking down on immigration and large
import tariffs on China – are expected to be inflationary for the US economy
and negative for global growth. If he is able to bring a quick end to both the
wars, in Ukraine and Gaza, oil prices are likely to continue falling under the
weight of weakening global demand.
There are various caveats to these expectations:
Global experts point to the strength of US institutions in
checking/ taming some of the draconian policies Trump has pledged. Second,
China has begun rolling out huge stimulus measures, both fiscal and monetary,
to revive its ailing economy (particularly its large property sector). This
could serve as a boost to global commodity prices.
For Pakistan, the prospect of lower or stable oil/ commodity
prices is positive. US-China trade war improves the opportunity to attract
Chinese industries into Pakistan. Certain exports out of Pakistan, including
steel and textiles, may become more competitive in the US. But, it could be a
challenge for Pakistan to execute CPEC Phase 2 in the face of deteriorating
US-China relations.
At this stage, the event does not materially affect outlook
of continued macro stability in Pakistan – continued disinflation and foreign
exchange reserves buildup – and equity market re-rating,
According to Pakistan’s leading brokerage house, Inter Market
Securities:
Oil prices are more likely to fall or stabilize around
US$70/bbl over the medium term. Trump is likely to encourage greater shale
oil production in the US, while at the same time, he would work to bring an end
to the conflicts in Ukraine and the Middle East.
Global inflation could make a comeback as Trump promises to
slap up to 60% import tariffs on China and up to 20% from elsewhere. He has
also committed to deport illegal immigrants from the country – which could
stoke another round of labor shortage in the United States.
US interest rates may remain elevated as the resurgent inflation
could lead to a slowdown of rate cuts in the US, leading to a stronger
greenback against other major currencies. This could mean that global equity
flows into the emerging and frontier markets would remain weak.
Raising debt through Eurobonds could therefore become
difficult for Pakistan. The USD index has appreciated 5% since September, while
the US 10-year bond yield has risen to 4.5% from 3.6% by end September – both
have risen in anticipation of Trump’s re-election.
Global growth could be slower and commodity prices,
depressed if Trump administration impose higher import tariffs on China, then
growth in China could be undermined (notwithstanding the stimulus measures the Chinese
government has recently begun rolling out. This would spell an extended period
of down-trending commodity prices and a global oversupply in some key
commodities (steel, petrochemicals) and products (EVs).
Weak US participation in achieving global climate
goals could reverse or slow down the recent trend of multilateral lenders
(IMF, WB and ADB) ramping up loans to developing economies for building defense
against climate change.
Possible
implications for Pakistan
A decline in global commodity prices would maintain the dis-inflationary
trend in Pakistan. However, a fresh wave of global inflation will be felt in Pakistan
through a stronger greenback and imported inflation. At this stage, the
brokerage house maintains it outlook for average inflation in Pakistan over the
next 12 months to be around 9% and expect the State Bank of Pakistan (SBP) to
cut the policy rate up to 11% by June 2025.
US-China trade war could make some exports out of Pakistan
more competitive in the US, compared to imports from China. These would
include HVA textiles, flat steel, tires and cement. However, if PKR-US$ remains
stable while other regional currencies depreciate against the greenback, it
could undermine the competitiveness of Pakistani exports.
Pakistan could see greater Chinese FDI. As Chinese
industries would continue to set up facilities outside China to avoid import
tariffs, some could potentially be set up in Pakistan. However, for this to
happen, Pakistan would have to offer a more stable policy environment to
Chinese investors, and the government may have to drop plans to renegotiate the
power tariffs of CPEC power plants, in our view.
