Michael Langham, Economist, Global Macro Research, at abrdn says:
Already market pricing ahead of Trump’s inauguration is having implications for emerging markets, with the dollar strengthening and US term premia rising. Ultimately, this is creating pressures on currencies and tightening external financing conditions, potentially giving policymakers less room to support their respective economies. Indeed, central banks with FX stability mandates, such as Bank Indonesia, may be constrained over the coming months and scope for further rate cuts limited. The risks are two ways: a more market friendly Trump policy agenda could eventually bolster risk assets and soften the dollar; conversely greater trade uncertainty and higher US inflation could create potent mix for the global economy.
However, many emerging markets are still likely to benefit from US-China tensions as a driver of reshoring. The US will need other countries more as its actions against China scale up.
And while Mexico will face the greatest cost of Trump’s efforts to crackdown on illegal immigration and ramp-up deportations, Mexico’s integration into US supply-chains makes it a likely beneficiary of further efforts to diversify supply from China or ‘nearshore’.
Finally, Trump’s approach to geopolitics has clear implications for Europe, the Middle East and Asia. While any success in negotiating a ceasefire between Ukraine-Russia would be market positive, it may not necessarily prove a long-term fix and military spending obligations on emerging Europe could rise. And it is unclear that Trump will deescalate tensions in the Middle East or ramp-up pressure on Iran. Moreover, how Trump approaches the Taiwan issue and security relationships in Asia will be key source of risk premia in markets such as Taiwan and the Philippines.
Ultimately, the impacts will be broad and often surprising, but emerging markets navigated the first Trump presidency and opportunities will emerge for those where policy is most flexible to external shocks.
Trade policy
Trade policy uncertainty will be difficult for many EMs to navigate. But there can be winners as well as losers in 2025 and beyond. Beyond China, Mexico and Vietnam’s large trade surpluses with the US put them at the greatest risk of punitive action from Washington. They, among other EMs in APAC, depend the most on exporting to the US, while also utilising substantial inputs from China. Another challenge stems from the risk of a potential devaluation in the yuan in response to US tariffs.
Moreover, while many EMs could navigate a rise in tariffs – or the indirect effects from Chinese depreciation on their trade-weighted baskets – via FX devaluation. However, US accusations of ‘currency manipulation’, which could be met with additional tariffs or other trade actions, may limit the scope for manoeuvre. Indeed, there is a risk that Trump pushes for a weaker USD. The re-routing of Chinese exports could ultimately prove disinflationary for other EMs as Chinese goods seek new markets. There is a risk that economies competing at similar levels to China’s manufacturing value add – such as Thailand or the emerging Europe economies tied to German supply-chains – face prolonged pressure.
