Donald Trump was declared the next president of the United States (US) on Wednesday, November 9. The election outcome caught markets by surprise, and the global economy is now facing significant uncertainty only months after another surprise decision by the United Kingdom to exit the European Union.
The consequences of a Trump presidency for Africa remain uncertain. Some broad Trump policy ideologies that have emerged include trade protectionism, fiscal austerity and anti-immigration, amongst others.
That said, questions remain as to how aggressive these policies will be pursued – Mr Trump’s stately victory speech was somewhat surprising and a sign that he will adopt a more measured approach as president.
The impact on global financial markets has been more muted than analysts feared, with initial sharp losses on major equity indices partially overturned on Wednesday already.
The safe-haven appeal of gold stood the Johannesburg Stock Exchange (JSE) in good stead, although the rand lost some 2.4% of its value against the greenback by the time of writing. Having weathered some tumultuous storms this year emanating from global risk events, financial markets seem to have taken a more sanguine approach to the US political dynamics.
With regard to monetary policy, the latest political developments could very well see a slower pace of US interest rate normalisation, due to an increase in uncertainty and given that US economic growth is seen as lower-than-baseline under a Trump presidency. In addition, safe-haven appeal would likely add to downward pressure on bond yields.
Domestic challenges and policy reforms will play a defining role in relation to how sensitive African currencies are to US political developments in the near term.
Kenya and Zambia for example have made progress with reining in volatility in their respective local currency units by utilising the price mechanism rather than throttling forex supply – which incentivises parallel market activity – whilst setting a credible precedent that monetary policy will be utilised to discourage speculative long-dollar positions.
In turn, substantial barriers to capital flows and current account impediments continue to weigh on the largest West African economies, distorting benchmark pricing, suppressing economic growth, and undermining proper functioning of the monetary policy transmission mechanism, ultimately discouraging private flows.
In the face of these substantial domestic challenges, we do not see the primary source of risk to most African currencies and fixed income markets as stemming from US political dynamics. The latter will however increase the probability that certain African sovereigns may not be able to meet external borrowing targets.
The medium- to long-term impact of Mr Trump’s presidency will only become clear once the dust has settled over the coming months. It is nonetheless prudent to briefly review the relationship between the US and Africa to identify some of the channels through which potential shocks could be transmitted.
Trade is one such channel to be mindful of, especially considering the president-elect’s protectionist stance in this regard.
Total trade between the US and Africa has declined sharply in recent years, mostly due to a decline in US imports from Africa – this is partly ascribed to the US shale-boom which reduced the need for African crude oil. In this sense, Africa has become less exposed to US demand. That said, a number of African countries still benefit immensely from the African Growth and Opportunity Act (AGOA).
A shift towards an investment strategy that is more inward looking – possibly to rebuild infrastructure and create employment as Mr Trump alluded to in the victory speech – may also hold direct implications for Africa.
According to the United Nations Conference on Trade and Development (UNCTAD), the US held the second largest amount of foreign direct investment stock in Africa in 2014.
The US also represents a key development partner of African countries. According to the Organisation for Economic Co-operation and Development (OECD), the US represents sub-Saharan Africa’s (SSA) principal benefactor in terms of bilateral official development aid (ODA).
A fiscal austerity drive could see the world’s largest economy rein in development aid, which would adversely affect countries such as Ethiopia, Kenya, Tanzania, Nigeria and the Democratic Republic of the Congo (DRC).
On the foreign policy front, many fear an escalation in conflict due to Mr Trump’s rhetoric regarding Islamic State, tearing up agreements with Iran, and renegotiating Nato agreements. But campaign trail rhetoric may in time give way to more level-headedness and American interests, and Mr Trump may backtrack on some of these statements.
We are moving into uncharted territory.
In the near term, the biggest risk relates to the impact of uncertainty on financial markets. That said, global financial markets have weathered a number of storms, emanating from different avenues, this year.
The surprise US election vote once again underlines the importance of strengthening fiscal and external buffers to limit spill-over to African economies, although we see risks to domestic financial assets as stemming primarily from domestic sources as opposed to external events.
That said, economies with little excess slack may necessitate a faster and more aggressive pace of monetary policy tightening to rein in growth in consumer prices and to anchor inflation expectations should exchange rate volatility gather pace.
Looking further ahead, while far from being insulated from US shocks via the channels outlined above, Africa may not be very high on the Trump administration’s agenda at first.
However, this is of little comfort, as adverse implications of US policy on key trading partners will ultimately spill over into African countries.
US policy towards China has to be monitored carefully moving forward due to the possible impact on demand for African minerals, investments from Beijing, Chinese loans for infrastructure development and the likely impact on commodity prices.