BARELY a day after his inauguration on Jan 20, US President Donald Trump got busy. Warming his chair in the Oval Office, Trump spent his first two weeks in office signing 45 executive actions to put some of his key campaign pledges in motion.
Yes, he still wants to build a wall along the US-Mexico border. He still wants to fight the Islamic State and yes, he still wants to focus more on the domestic economy.
Although most of his moves are domestically driven, whatever he says and does has reverberations and ramifications across the globe. Look no further than his recent travel ban on citizens of seven Muslim-majority countries, namely Iraq, Syria, Iran, Sudan, Libya, Somalia and Yemen.
“The whole world is worried. Everyone is just waiting and hoping,” says KRA Group head of research Keith Leong.
Malaysia, like most countries, is not insulated from the effects of Trump’s policy actions in the US.
Leong reckons that Malaysia’s key vulnerability is economic in nature, particularly if Trump adopts more nationalist economic policies such as protecting American industries and forcing US firms to bring jobs back home.
“The key to understanding how vulnerable Malaysia could be with Trump is to ask if any of Malaysia’s interests or priorities jeopardise his agenda,” he says.
In a Jan 27 report, Nomura placed Malaysia among the emerging market (EM) economies that have high vulnerability to Trumponomics.
As Nomura points out, US demand for manufactured exports has been key to Malaysia’s economic resilience over the past two years, supporting employment and private consumption amid the implementation of the Goods and Services Tax.
“The prospect of protectionist US policies could threaten US demand for Malaysian manufactured exports, in effect turning a source of resilience into one of vulnerability,” Nomura says in its report, “EM’s struggle with ‘America First’ policies”. “The US accounts for about 10.3% of Malaysia’s merchandise exports and 10.5% of foreign direct investment inflows.”
Additionally, the US’ protectionist stance under Trump could indirectly hurt Malaysia’s exports of intermediate goods to China.
Trump’s administration has certainly not been coy about taking a more protectionist stance where the American economy is concerned.
Apart from pursuing more preferable trade deals, analysts and economists expect his administration to come up with policies on stricter visa and travel requirements, as well as impose more import tariffs and incentives or penalties to encourage more production on American soil.
As Nomura casts it, “America First policies = Emerging markets last policies”. Trump’s aim to make America great again will inevitably entail policies that will be negative overall for emerging markets.
Many emerging markets are starting from a weak position to fend off Trumponomics.
“Asia is likely to be more vulnerable than most people think, but (it) is cushioned by large fiscal stimulus. The only EM that could benefit is Russia,” says Nomura. “In Asia, many economies already face stiff structural headwinds from late-stage credit cycles, shrinking workforces and a slowing China.”
According to a local economist, Malaysia’s key vulnerability lies in the risk of a faster-than-expected rise in US interest rates and a stronger US dollar, which will result in fast capital outflows.
The US Federal Reserve is widely expected to raise the key policy rate at least twice annually over the next two years.
However, the Fed recently kept its benchmark overnight lending rate target in a range of 0.5% to 0.75% following a meeting of its Federal Open Market Committee on Feb 1.
The benchmark rates have been hovering at near zero levels for the last decade. Last December, the Federal Reserve moved the benchmark rate up 25 basis points, the second hike in over 10 years.
What’s more, foreign investors hold a substantial 47.1% of Malaysian government securities.
“Given the state of our economy and forex reserves, Malaysia may not be in the strongest position to weather whatever headwinds that is to come — with Trump in the US, Brexit on the way and China’s slower growth,” the local economist says. “We are not upbeat at all. There are more challenges and uncertainties than there are catalysts for Malaysia at this point.”
Nomura cautions that emerging markets with high external debts and large current account deficits are particularly exposed to capital flight and currency depreciation.
Government data shows that while Malaysia has relatively high external debt levels, the current account is in surplus.
In 3Q2016, Malaysia’s current account surplus widened to RM6 billion from RM1.9 billion in the preceding quarter, thanks to a larger goods account surplus that more than offset the higher deficit in the services and investment income accounts.
Meanwhile, Malaysia’s external debt rose 1.73% to RM865.2 billion as at 3Q2016 from RM850.6 billion a year before.
However, total external debt (redefined) to GDP fell to 70.2% in 3Q2016 from 73.5% a year before.
Bank Negara notes that Malaysia’s external debt remains “manageable”, with medium to long-term external debt accounting for 61.4% of the outstanding position.
Nevertheless, Bank Negara has assured that Malaysia’s international reserves of US$94.3 billion (RM422.9 billion) as at Jan 13 are ample to facilitate international transactions.
The central bank also noted that the reserves were sufficient to finance 8.7 months of retained imports. It is 1.3 times short-term external debt.
Despite it all, those looking for a sliver of hope in the midst of such uncertainty could hope that Malaysia will stand to gain from Trump’s antagonism towards Muslim-majority countries.
Many of us might recall that in the wake of the Sept 11 attacks and ensuing Islamophobia in the US, Malaysia was a key beneficiary of tourists, students and deals from the Middle East.
As AirAsia Bhd group CEO Tan Sri Tony Fernandes tweeted last week, “With the world now getting more isolationist, it’s time for Asean to start making it easier for tourists to come. Need an electronic Asean visa.”
Yet, the opportunities do not seem to match up with what Malaysia stands to lose from a more protectionist US.
Analysts have pointed out that the key area in which Malaysia could be directly impacted is the US’ withdrawal from the hard-fought 12-nation trade pact, the Trans-Pacific Partnership, which was negotiated under the Obama administration.
Apart from leaving the TPP deal, Trump has also said he intends to renegotiate the North American Free Trade Agreement to get a “better deal” for the US.
KRA Group’s Leong points out that Malaysia has lost or stands to lose opportunities like the TPP, given Trump’s stance of pursuing a “nationalist and mercantilist economic agenda”.
“People talk about continuing the TPP without the US but that was its main draw!
“Years ago, we tried to negotiate a bilateral free-trade agreement with the US but that didn’t work, so it is hard to see how this (TPP) can succeed with Trump in charge,” says Leong.
He points out that trade in goods receipts between the US and Malaysia have been in the latter’s favour since 1985, at least.
According to US Census Bureau figures, the US ran a US$22.85 billion trade deficit with Malaysia in 2016, the second highest gap in three decades. The highest since 1985 — US$24.09 billion — was recorded in 2006.
“That is something that may raise Trump’s ire,” Leong notes.
Moody’s Investors Service says the US’ withdrawal from the TPP is a material loss for countries like Vietnam and Malaysia, which will miss out on export and growth opportunities.
“[These countries] would have benefited from the opening up of trade with the US and relatively large foreign direct investment (FDI) inflows over the long term.
“Moreover, TPP ratification in Malaysia would have necessitated reforms to state-owned enterprises and government procurement. It is now unclear whether such reforms will proceed,” says Moody’s in a Feb 1 note.
Trade aside, Malaysia’s geopolitically ties with the US have been better in recent years, says Leong. This is evidenced by the increase in bilateral visits in recent years and the Obama administration’s general pivot to Asia. “It’d be a shame if this (ties) is rolled back,” Leong says.
Malaysia has been adopting a largely ambiguous stance, balancing between remaining friendly with the US and courting China for investment deals.
“It has been our default foreign policy. We have to keep trying to walk this ‘tightrope’, which has served us well thus far,” Leong says.
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