The repercussions of US President-elect Donald J. Trump's protectionist trade and expansionary fiscal policies would slow the pace of interest rate cuts in emerging markets like the Philippines, according to Oxford Economics.
In a report, Oxford Economics emerging markets economist Callee Davis noted that central banks in the Philippines, Chile, Colombia, Czech Republic, Mexico, Peru and South Africa slashed key borrowing rates during the past two months, as they belonged to what the think tank deems as the most hawkish emerging economies.
Davis said "these recent rate cuts were warranted, and further easing is likely in the coming months" among those central banks," including the Bangko Sentral ng Pilipinas (BSP).
But amid expectations that the US Federal Reserve's own easing cycle may normalize rates more gradually, "we think there will be fewer rate cuts across emerging markets over the medium term," Davis said.
In the case of the BSP, Governor Eli M. Remolona Jr. this week said rate cuts may take a backseat to "some inflationary pressure" persisting alongside "somewhat weak" economic growth.
Amid Trump's triumph, 10 emerging-market currencies, including the Philippine peso, collectively weakened against the greenback, as US Treasury yields climbed while markets braced for a bloated budget deficit plus higher debt when the US President-elect returns to power.
"We think markets have yet to process the full implications of many of Trump's policies. Our calculations suggest that several emerging-market currencies may be underpricing Trump tariff risks, and could depreciate by an additional five percent in response to a 10-percent blanket tariff by the US," Davis warned.
Based on Oxford Economics data, the US trade deficit with the Philippines is relatively small, compared to those with China, Mexico, Vietnam, India, Thailand and Malaysia, which Davis warned are "at risk of targeted US tariffs."
Across emerging markets, Davis said "weaker currencies, a slight bump in goods deliveries ahead of US tariff hikes, and stronger US demand are expected to lift short-term growth."
"However, higher US tariffs and increased interest rates will push medium-term emerging markets growth lower," Davis added.
In a Nov. 21 report, the Washington-based Institute of International Finance (IIF) said Trump's possibly full tariff on China, coupled with looming trade barriers via moderate or selective tariffs for other economies, "could lead to significant shifts in global trade patterns, presenting both risks and opportunities for other emerging markets."
"The realignment of supply chains away from China, combined with trade diversification efforts, could position certain emerging markets as alternative manufacturing hubs, while others may face challenges due to sectoral dependencies on the US and Chinese markets," IIF managing director and chief economist Marcello Estevão and economist Jonathan Fortun explained.
"As US firms look to reduce exposure to Chinese tariffs, several emerging markets, especially in Latin America and Southeast Asia, could attract new manufacturing investments," the IIF noted, mentioning rosy nearshoring prospects specifically for Mexico and Vietnam.
The IIF cited that so far since Trump's election victory early this month, "the scale of emerging markets' currency depreciation has been notably smaller compared to the days following Trump's 2016 election, when heightened uncertainty drove sharper declines across the emerging markets complex."
"This more muted reaction suggests a market sentiment that Trump's tariff agenda might not fully materialize or that tariffs could be deployed strategically, depending on trade negotiations with key partners," according to the IIF.