Can Trump stifle our growth momentum?
If you thought Brexit was a fluke, then think again. The new game in town, populism, paved the way for Donald Trump to capitalise on economic and social frustrations of the forgotten blue-collar American, and complete, arguably, the biggest political upset in modern history. Global politics has stepped into alien territory, and it seems to have taken one of its faithful companions along for the ride: the global economy.
The ancient bridge of free trade and unrestricted mobility of labour that connected people, goods, technology and entire nations for decades is finally crumbling. Is this the dawn of a new era where countries abandon economic integration and adopt a destructive doctrine of "every man for himself", or is it just a passing storm? If the success of Mr. Trump's de-globalisation diatribes that propelled him to American presidency is any indication, it might just be the former. The consequent ramifications for countries all over the world, developed and developing, would be massive. Bangladesh is no exception.
Bangladesh is on the cusp of breaking the 6-percent growth trap in a sustainable manner, not just from temporary tailwinds of higher public sector salaries. The political environment is relatively stable, borrowing costs have come down, manufacturing growth remains firm, inflation is easing, public sector investment is rising, foreign direct investment is gradually increasing and finally, exports are as steady as ever but still can do much better.
Now, we are all hoping to see two interconnected engines - private investment and export-led growth - shift into overdrive and carry our economy into the illustrious stage of 7-percent growth and beyond. Yet, export-led prosperity can be maintained only if the current wave of protectionist sentiment sweeping through America (and advanced economies in general) subsides in the near-term.
Trump's rise to commander-in-chief throws such hope into an acute state of uncertainty. His pledge to bring back jobs by writing the obituary on free trade from day one in office could push global economic recovery off the cliff. A re-cooked concoction of the 23-year old North American Free Trade Agreement (NAFTA) that puts "America first", if combined with a withdrawal from the Trans-Pacific Partnership (TPP) and tariffs on China, could well mark the beginning of the end of a world economy led by trade.
Trade analysts will remind us that China could come to global trade's rescue if Trump turns his back on globalisation. But the extent to which Beijing can take the helm remains uncertain if we agree that America still holds the key to the technological expertise and innovation that underpin world trade. The upshot is stymied demand from advanced and big emerging economies, hurting economic activity in developing countries like Bangladesh which count on the exuberance of external markets.
The trade factor aside, Trump's promise of rejuvenating growth by showering America with tax cuts and infrastructure spending is another red flag, albeit not one for the near-term.
The ensuing economic boom from a Keynesian-flavoured fiscal tonic will appear alluring at first. But it will engorge American debt (already over 100 percent of GDP) and over time strangle productive investment. As unlikely as it may seem right now, a recession might well be in the offing when fiscal cracks widen in the medium-term. Such shocks typically spill-over to other big economies and inevitably hit the coasts of developing countries like ours through stifled external demand.
Meanwhile, with the rules of the game changing, one of the first players to react is the US dollar. Electrified by colossal amounts of capital inflows amid expectations of a Trump-powered rise in growth, inflation and interest rates, the greenback recently touched a 13-year high against a basket of currencies which includes the Euro, the British pound and Malaysian ringgit, to name a few.
Considering that the taka is tightly fastened to the dollar, our exchange rate is undeniably appreciating vis-à-vis major non-dollar currencies, home to enormous volumes of Bangladeshi exports. So a textbook loss of external competitiveness looks the most likely outcome from the dollar's current surge. All the more reason for Bangladesh to peg the taka to a currency basket instead of just the dollar (for details, see "Dollar-peg is a double-edged sword", The Daily Star).
That brings us to financial risks. Trump's promise of making America great again by igniting fiscally-fuelled growth and inflation could tempt the US Federal Reserve to hike interest rates faster than what markets previously anticipated.
To be sure, Bangladesh will not have to worry about portfolio flows gushing back to America lured by higher rate of return. We never had deep capital markets to attract that kind of money to begin with. But we still have private foreign loans to keep track of. Borrowing rate on these loans are tied to a benchmark rate, known as the London Interbank Offered Rate (plus a risk premium) which is likely to rise as the Federal Reserve responds to Trump's fiscal easing with monetary tightening to keep prices under control, raising our debt-servicing cost.
From our end, higher interest payments will swallow funds for business expansion, at a time when these big corporate borrowers need to take the lead role in re-energising private investment in Bangladesh.
Critics of financial openness will try to convince our leadership to pull the plug on private sector's foreign borrowing. But shutting the door on external lenders cannot be the response to a source of capital utilised so extensively by other developing countries. Interest rates will always come with a cold touch of uncertainty and even more so during Trump's presidency. The call here is to build better shields with appropriate hedging instruments as borrowers do worldwide.
Analysts concerned more about bilateral aid flows have little reason to lose sleep. America's role in Bangladesh's development funding has diminished considerably over the years relative to Japan, the United Kingdom and Canada. That, put together with China's recent USD 20+ billion buffet salted with new contributions from the Asian Infrastructure Investment Bank, will offset any risk Trump might pose to bilateral aid flows from the US.
The less said about immigration the better. America's pristine image of being a safe haven for immigrants is fading fast, taking with it the ideas and skills brought by people from all over the globe. To what extent immigrants are 'stealing' American jobs, I leave for readers to decide. But tightening regulations on work permits, or even worse, deporting thousands of Bangladeshis will unquestionably stifle remittance inflows from America which stood at USD 2.4 billion last fiscal year. Third only to Saudi Arabia and UAE for the record.
And so at the end of the day, we can only hope that common sense will prevail and the man who takes office will be different from the man who ran for president. Or that Congress can act as a handy check-and-balance against outlandish policies. If not, Bangladesh's growth momentum might fall prey to a new world order characterised by Trumpism.
The writer is a macroeconomic Research Analyst for an organisation in Washington D.C. and Research Fellow for the Asian Centre for Development in Dhaka.
Email: sharjilmuktafi.haque@gmail.com