Wide-ranging sovereign rating implications from the election are unlikely to arise in the near term. But shifts in US policy can have global ramifications given the country's role as the world's largest economy and its pre-eminent diplomatic and military power. Clarity on how much of Trump's campaign rhetoric will translate into policy will take time to emerge, but his emphasis on greater protectionism and a more unilateral foreign policy highlight two potential sources of spill-over.
President-elect Trump's plan to renegotiate the North American Free Trade Agreement (NAFTA) would have a direct impact on Canada and Mexico. A major shift towards trade protectionism in the US could also have a significant impact on China and on Asian economies that supply intermediate goods to China.
If the new administration pursued more aggressive tariff policies towards China, we would expect China to take counter measures, with adverse consequences for growth and inflation in both countries and potentially RMB depreciation and risk aversion in financial markets that would likely spill over into other emerging markets. However, a sharp increase in protectionism would be resisted by US corporate lobbyists and mainstream Republican legislators, and we think incremental measures, such as bringing trade cases, are more likely.
Trump's campaign rhetoric on foreign policy also lacked detail. He has spoken favourably about Russian President Vladimir Putin, and may take a more accommodative stance towards attempts to extend Russia's sphere of influence. Potential US military retrenchment could increase defence spending in Europe, Asia, and the Middle East, adding to pressures for looser fiscal policy. It could also give China an opportunity to expand its regional strategic presence.
The US election outcome highlights the growth of anti-establishment populism, which is also evident in Europe. The Trump phenomenon may boost support for European political leaders and parties outside the traditional centre-left and centre-right. In response, mainstream parties may accelerate fiscal loosening or pull back from structural economic reform.
The reaction in financial and commodity markets could also affect sovereigns outside the US. Some commodity prices rose in anticipation of US fiscal stimulus. But higher US Treasury yields could push up funding costs for other sovereigns, while a stronger dollar may be negative for emerging markets with significant foreign currency debt burdens.
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