The US election and its impact on emerging markets - Capital Economics
Emerging Markets Economics

The US election and its impact on emerging markets

Emerging Markets Economics Update
Written by Edward Glossop
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Whatever the outcome of the US election, we expect that the trends of US-China decoupling and deglobalisation will continue. The election result could be pivotal for some EMs: a Joe Biden victory could raise geopolitical tensions with Turkey and Russia. In contrast, another four years of Donald Trump might see him take a harder line on some smaller EMs in Asia – most notably Vietnam.

  • Whatever the outcome of the US election, we expect that the trends of US-China decoupling and deglobalisation will continue. The election result could be pivotal for some EMs: a Joe Biden victory could raise geopolitical tensions with Turkey and Russia. In contrast, another four years of Donald Trump might see him take a harder line on some smaller EMs in Asia – most notably Vietnam.
  • Our US service remains the place for detailed analysis on the election. In short, Biden is currently favourite to win on 3rd November – betting website PredictIt puts his odds at close to 65%. The same website puts the chances of a Democratic clean sweep, in which the party wins the presidency and both houses of Congress, at 57%. That said, there is still a lot of campaigning to do. And it’s worth remembering that Trump’s odds of victory on the eve of the 2016 vote were just 25%.
  • Our US Focus explains in detail how we think different election outcomes will shape the US outlook and the policymaking environment. But in terms of the impact on EMs, there are four key points to emphasise.
  • First, this election is unlikely to be as pivotal for Mexico, and potentially China, as the 2016 vote. Recall that Trump repeatedly threated significant protection measures (including large blanket import tariffs) on both countries during the last election campaign.
  • The USMCA trade deal between the US, Mexico and Canada reduces, although doesn’t completely remove, the threat of US tariffs on Mexican imports. Mexico still runs a large trade surplus with the US, which could at some point convince Trump to push for more trade protection measures. But there would be trade risks under Biden too, if he and the Democrats pushed for stricter environmental and labour laws.
  • Overall, a Biden victory would probably still be the preferred outcome for Mexico’s financial markets. The outperformance of the peso against the dollar over the past few weeks compared with other EM currencies has coincided with the increase in Biden’s chances of winning.
  • However, given that we expect US GDP growth to be broadly similar under either candidate, Mexico’s growth prospects shouldn’t be significantly impacted. Indeed, although Biden has promised to boost government spending, his budget plans are overall fiscally neutral. Instead, domestic factors will be the main factor shaping the outlook for Mexico. On this front, the continued spread of COVID-19 and limited fiscal support will constrain the recovery.
  • Meanwhile, as we’ve argued elsewhere, the rift between the US and China reflects the latter’s emergence as a geopolitical competitor to the US, rather than the personality of Trump. Indeed, attitudes towards China have become more hawkish across the US political spectrum.
  • Accordingly, while Trump may take a more aggressive approach towards Beijing, we doubt that Biden would immediately remove US tariffs on China. Indeed, under both Trump and Biden, the ‘trade’ war is likely to spread to new limits on market access and flows of technology (and possibly finance).
  • This feeds into the second important point for EMs, which is that we expect deglobalisation to continue regardless of who wins The White House. The outcome of the vote is unlikely to affect the fundamental factors that have caused globalisation in its current form to run its course, including technological progress that is making it cheaper to produce domestically. (See here for our work on deglobalisation.)
  • Given that EMs were the key beneficiaries of the latest wave of globalisation that started in the 1990s, they are likely to be the biggest losers from continued deglobalisation. This is one reason why we were pessimistic on the prospects for EM growth even before the pandemic struck.
  • The third point, however, is that while the US election outcome won’t significantly alter the broad trends of deglobalisation or US-China decoupling, it could be more pivotal for some specific groups of EMs.
  • A Trump victory would probably create downside risks for some smaller Asian countries – notably Vietnam, and possibly Taiwan and Thailand. These countries’ have received an offsetting boost from higher exports to the US since the trade war with China began. And large trade surpluses with the US have widened further recently. This raises the risk that these countries are labelled currency manipulators, and possibly hit with tariffs. In contrast, trade frictions under Biden would probably remain focussed on China.
  • For Turkey, Russia and Saudi Arabia, a Biden victory would probably create downside risks. His tougher stance on Russia and Turkey suggests that relations with these EMs would deteriorate on his watch, possibly paving the way for an escalation of sanctions.
  • Depending on what form these take, they could pose a big threat to Turkey in particular. The country is highly reliant on external financing and has a very fragile banking sector. This makes the lira vulnerable to large and disorderly falls. (See our Emerging Europe service for more.)
  • Moreover, Biden’s greater emphasis on climate change and clean energy could also have ramifications for Russia, Saudi Arabia and other major EM oil producers. We think that COVID-19 has brought forward the peak in oil demand. Biden’s climate change mitigation policies (such as eliminating fossil fuel subsidies and banning new drilling in places) could accelerate this shift.
  • The resulting fall in real oil prices would weaken terms of trade and national income growth in Russia and Saudi Arabia – although the latter’s very low costs of production mean that it could continue producing at very low prices for a long time.
  • Finally, were the vote to cause a deterioration in risk appetite, most EMs should be able to weather this. Perhaps the worst outcome for EM financial markets would be a contested election. The period of uncertainty could cause appetite for risky assets to sour.
  • But the fallout for EMs from a period of risk-off would probably be manageable. EM currencies have already fallen a long way this year. And few look very overvalued. Moreover, current account positions have generally improved this year, reducing EMs’ vulnerability to any tightening of external financing conditions.
  • The exception is Turkey, where the central bank is already hiking interest rates and a fresh slowdown in capital inflows and falls in the lira would probably force the central bank to tighten monetary conditions more aggressively.

Edward Glossop, Senior Emerging Markets Economist, edward.glossop@capitaleconomics.com
Jason Tuvey, Senior Emerging Markets Economist, jason.tuvey@capitaleconomics.com