Donald Trump’s second term as the US President is expected to profoundly impact geopolitics and global asset/commodity prices, which would ultimately have implications for the ongoing macro recovery in Pakistan. As we write, there is a high probability of a “clean sweep” by the Republican Party (that is, it is likely to take control of both the US Senate and House), giving Trump greater ability to execute his campaign pledges.
Trump’s policies—cracking down on immigration and imposing large import tariffs on China—are expected to be inflationary for the US economy and negative for global growth (hence commodity prices). If he is able to bring a quick end to both the wars in Ukraine and Gaza, oil prices are likely to continue falling under the weight of weakening global demand.
There are two caveats to these expectations. First, global experts point to the strength of US institutions in checking/ taming some of the draconian policies Trump has pledged. Second, China has begun rolling out huge stimulus measures, both fiscal and monetary, to revive its ailing economy (particularly its large property sector). This could serve as a boost to global commodity prices.
For Pakistan, the prospect of lower or stable oil/commodity prices is positive. US-China trade war improves the opportunity to attract Chinese industries into Pakistan. Certain exports out of Pakistan, including steel and textiles, may become more competitive in the US. But, it could be a challenge for Pakistan to execute CPEC Phase 2 in the face of deteriorating US-China relations.
Nonetheless, at this stage, the event does not materially affect our outlook of continued macro stability in Pakistan – continued disinflation and FX reserves buildup – and equity market re-rating, from the current c.5.0x Fwd PE towards LT average PE of around 7.5x.
Our initial thoughts are:
Oil prices are more likely to fall or stabilize around US$70/bbl over the medium term. Trump is likely to encourage greater shale oil production in the US; while at the same time, he would work to bring an end to the conflicts in Ukraine and the Middle East. Brent has fallen 2% in the past two days.
§ Global inflation could make a comeback. Trump has promised to slap up to 60% import tariffs on China and up to 20% from elsewhere. He has also committed to deport illegal immigrants from the country – which could stoke another round of labor shortage in the US (a prime driver of high inflation during the post-Covid years).
§ US interest rates may remain elevated. Resurgent inflation could lead to a slowdown of rate cuts in the US, leading to a stronger USD vs other major currencies. This could mean that global equity flows into the emerging and frontier markets would remain weak. Raising debt through Eurobonds could therefore become difficult for Pakistan. The USD index has appreciated c.5% since September, while the US 10yr bond yield has risen to c.4.5% from 3.6% by end-Sep – both have risen in anticipation of Trump’s re-election.
§ Global growth could be slower and commodity prices, depressed: If the Trump administration impose higher import tariffs on China, then growth in China could be undermined (notwithstanding the stimulus measures that the Chinese gov’t has recently begun rolling out). All else the same, this would spell an extended period of down-trending commodity prices and a global oversupply in some key commodities (steel, petrochemicals) and products (EVs).
Weak US participation in achieving global climate goals could reverse or slow down the recent trend of multilateral lenders (such as the IMF, WB and ADB) ramping up loans to developing economies for building defense against climate change.
Possible implications for Pakistan
§ A decline in global commodity prices would maintain the disinflationary trend in Pakistan, all else the same. However, a fresh wave of global inflation will be felt in Pakistan through a stronger USD and imported inflation. At this stage, we maintain our outlook for average inflation in Pakistan over the next 12 months to be around 9% and expect the SBP to cut the policy rate to 11-12% by June 2025.
§ US-China trade war could make some exports out of Pakistan more competitive in the US, compared to imports from China. These would include HVA textiles, flat steel, tires and cement. However, if PKR-USD remains stable while other regional currencies depreciate against the greenback, it could undermine the competitiveness of Pakistani exports.
§ Pakistan could see greater Chinese FDI. As Chinese industries continue to set up facilities outside China to avoid import tariffs, some could potentially be set up in Pakistan (Servis Long March Tyres Pvt. Ltd. is a good example). However, for this to happen, Pakistan would have to offer a more stable policy environment to Chinese investors, and the government may have to drop plans to renegotiate the power tariffs of CPEC power plants.
