How Trump’s victory creates mixed fortunes for Africa’s economies

LAGOS (Capital Markets in Africa) – Donald Trump’s recent victory as US’ 45th president leading to concerns around US political risk and its implications for the world economy as well as protests and demonstrations across the United States however his unconventional rhetoric during his campaign trail caused concern to global currencies and capital markets and is likely to create mixed fortunes for African economies says an Economic Report by Ecobank . In the short term the global markets experienced knee-jerk movements in the currency, capital markets and in base metals, the USD weakened against major world currencies but remained strong against Emerging Market (EM) and Frontier Market (FM) currencies.

Trump has promised to double Hillary Clinton’s infrastructure spending (implying at least 0.6% of GDP per year) and cut taxes worth USD 3,000bn (1.6% of GDP per year): this equates to a fiscal easing of at least 2.2% of annual GDP. Such a move, the report says, is likely to increase US’ debt levels in the medium- to long-term, increasing the risk of a sovereign risk downgrade – the US could lose the last two of its ‘AAA’ ratings by Moody’s and Fitch. Higher debt levels point to the low fiscal multiplier effect, slower growth and higher rates, all of which bodes ill for Sub-Saharan Africa.

Further short-term implications for Sub-Saharan African economies are:

US real GDP growth to continue – The US economy is unlikely to be hit hard by uncertainties over Trump’s victory. The factors alluded to above will continue to support economic activity in the US, reducing any scope for a recession or any major economic slowdown. We still expect US real GDP to post around 2% growth in 2017.

Continued support for FDI into Africa – With the US being one of the top three investing countries in Africa (in terms of its CAPEX amount – USD7bn in 2015) this bodes well for FDI into Africa, providing support for exchange rates and inflation.

Likelihood of a US Fed rate hike – the US’ strong economic fundamentals are likely to sustain a high likelihood of a rate hike at the US Federal Reserve’s next monetary policy meeting scheduled for December 2016.

USD to strengthen  – If this happens, it will lead to USD strengthening (which will be negative for African currencies and commodities), and higher financing costs for already cash-strapped African governments such as Nigeria, Angola, Mozambique, increasing repayments risk.

High costs for sovereigns – President Trump may replace US Federal Reserve Chairwoman Janet Yellen, who is somewhat perceived as a dovish governor, for a more hawkish governor – sustaining high costs for Africa’s sovereigns.

Increased currency volatility – While proposed fiscal stimulus (less regulation, lower taxes, and infrastructure spending) should provide some support for EM and FM, Trump’s rhetoric for increased protectionism (NAFTA; North American Free Trade Agreement, TPP; Trans-Pacific Partnership; China, etc.) and tougher immigration stance will be a major source of contention in Congress; this will also be a key source of market volatility in world trade and currency markets, increasing currency volatility in African markets.

The risk to Tariff-free Trade – Such a stance in US’ trade policy could also pose a risk to trade with Africa. Under the US’ Africa Growth and Opportunities Act (AGOA) 2000, African countries can export eligible goods to the US free of import tariffs. Current beneficiaries of this trade deal risk losing this opportunity as a result of Trump’s victory, potentially undermining exports.