Thursday, 1st December 2016

Trump’s domestic priorities may weigh heavy on Gulf economies

While governments around the Gulf struggle to come to terms with what the looming Donald Trump presidency might mean for them in terms of changes to US foreign policy – an imprecise science given the lack of clarity or consistency from the president-elect – another aspect of the maverick billionaire’s victory ought to be rising up their list of concerns: the potential impact of his domestic policies, which could indirectly pile more pressure on Gulf currencies pegged to the dollar, leading to higher interest rates and slower economic growth.

Trump’s policy platform remains a work in progress (to put it politely), but a few areas already stand out as having potential to affect the Gulf, including energy and fiscal spending. Trump has promised to cut back on environmental legislation and ease fuel efficiency standards for vehicles, which is likely to boost demand for oil; on the other hand he has also vowed to open federal lands and waters to drilling companies, which could increase US supply. The way in which this mix of policies is enacted will contribute to pushing international energy prices up or down. (While there was great focus on the potential impact on oil exporters of Opec’s 30 November decision to cut output (see Energy) canny analysts also observed that a strengthening of prices would favour bringing shut-in oil shale fields back on stream in the US, with significant consequences for the medium-term price outlook.)

Trump’s planned fiscal stimulus could prove highly significant. The president-elect has vowed to invest heavily to improve America’s creaking infrastructure, including $550bn to be directed towards roads, bridges, airports and ports. Capital Economics’ Middle East economist Jason Tuvey points out that a looser fiscal policy will almost certainly need to be met by tighter monetary policy, in the form of higher interest rates. His London-based firm suggests rates in the US will increase by 2.25% between now and end-2018, which will have a knock-on effect on Gulf Co-operation Council (GCC) currencies pegged to the dollar.

“The Gulf’s dollar pegs, which we expect to remain intact, and open capital accounts mean that domestic monetary conditions have to follow those in the US,” Tuvey said. As a result, “monetary conditions in the Gulf are set to tighten more aggressively than we had previously thought, adding to the headwinds facing these economies from low oil prices.”
Higher interest rates in the GCC will act as a brake on the region’s economies at a time when their governments are desperately searching for new ways to boost non-oil activity. It will also mean higher borrowing costs for companies and governments – another key consideration given the rise in sovereign bond issuance (GSN 1,023/8). Interbank rates in Saudi Arabia have already been steadily increasing for the past 18 months, with the benchmark three-month Saudi Arabia Interbank Offered Rate (Saibor) rising from 0.77% in April 2015 to 2.37% in October 2016. There was a drop in November to 2.10%, helped by the improving sentiment towards the kingdom as a result of its successful $17.5bn bond issue (GSN 1,026/12). However, Trump’s victory in the US means most observers now expect rates to start rising again.

There is one major caveat to all this, in the shape of Trump’s ability to push his agenda through Congress. The Republican Party now controls both houses which, in ordinary circumstances, would make it relatively easy for a Republican president to move ahead. However, the type of big-government thinking that the infrastructure spending represents is anathema to many elected Republicans, and it could be a challenge for Trump to persuade Democrats to back his policies as well, given his advocacy of huge tax cuts.

Greenberg Quinlan Rosner Research chief executive Stan Greenberg thinks Trump will face significant bipartisan resistance in Congress. “Republicans have almost no interest in what he is proposing… so I think he will lose Republicans on the infrastructure plan,” the veteran US political pollster and strategist told the Chatham House think-tank in London on 23 November. “I’d be very surprised if it happens. I think we’ll look at pretty much nothing happening on infrastructure short-term.”

Trump’s ability to enact his agenda depends heavily on his appointments, which Congress will have to approve. Key economic policy appointments have tended to go to establishment figures. Former Goldman Sachs executive and Trump’s campaign finance chairman Steven Mnuchin was named treasury secretary and billionaire investor Wilbur Ross has been put forward as commerce secretary. New transportation secretary Elaine Chao must deliver Trump’s infrastructure plans. Married to Senate majority leader Mitch McConnell, Chao served as labour secretary under George W Bush. As GSN went to press General James ‘Mad Dog’ Mattis – battle-hardened in Afghanistan and Iraq, and no fan of the Iran nuclear deal (GSN 928/10) – was named secretary of defence, Congress permitting..

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