Dr. Mohd Afzanizam Abdul Rashid Chief Economist 03-2088 8075 afzanizam@bankislam.com.my US Presidential Election 2016 The "Trump" Card The US Presidential Election 2016 on November 8 was another surprise after more than four months of Brexit vote in June. Mr Donald Trump become the 45 th US President when the tally crossed 270 after winning Wisconsin (see Table 1). Also, the Republican remained in control of both houses Senate & House of Representatives. The ensuing volatility in the financial market was pretty much expected. The FBM KLCI was down by 16.2 points by end of the day to close at 1,647.62 while MYR/USD depreciated to RM4.2352 from the previous day close of RM4.2017. Mr. Trump was very critical on China especially in areas relating to international trade and currency. In addition, his economic policies are deemed to be inward looking given his commitment to create more jobs for the US citizens. This has created uneasiness among the global community as to how Mr Trump would steer the economy and its foreign policy. Table 1: Election Results Candidate # Votes Candidate # Votes Clinton 218 Trump 279 Senate # Seats # Seats Democrats 47 Republican 51 House of Representative # Seats # Seats Democrats 191 Republican 236 Source: The New York Times Why Trump? We believe the answers lies with the state of economy in US. After globalisation taking its shape since 1990 (Washington Consensus and the fall of Communism in 1989), more jobs are being outsourced beyond the US soil. As a result, less jobs were available particularly the semi-skilled workers in the manufacturing sector, leading to income inequality. Such connotation is based on the decline in the US Labour Force Participation Rate (LFPR) which is the number of people in the labour force as percentage of the civilian non institutional population 16 years and above. The latest LFPR stands at 62.8% as of October this year. This would simply mean only 62.8% of the civilian non institutional population 16 years and above are engaged with the labour market (see Chart 1). In other words, about 37.2% of the population in this category is out from the labour market systems. The outturn was in stark contrast to 67.3% recorded at the end of 2000. Such fact was reinvigorated by the number of persons outside from the labour force which is also rising. The latest number stands at 94.6 million as of October 2016 (see Chart 2). There are several reasons why LFPR on a declining trend. Among them are aging populations, permanent disability, going back to school and last but not least, globalisation (Litzinger and Dunn 2015). For Internal Circulation Page 1
Chart 1: Labour Force Participation Rate (LFPR) % 68.0 67.0 67.3 66.0 65.0 64.0 63.0 62.0 61.0 60.0 Post globalisation era since Washington Consensus in 1989 62.8 59.0 Feb-80 Feb-84 Feb-88 Feb-92 Feb-96 Feb-00 Feb-04 Feb-08 Feb-12 Feb-16 Chart 2: Not in labour force ( 000) 100,000 95,000 94,609 90,000 85,000 80,000 75,000 70,000 65,000 60,000 55,000 50,000 Feb-80 Feb-84 Feb-88 Feb-92 Feb-96 Feb-00 Feb-04 Feb-08 Feb-12 Feb-16 As globalisation increasingly become the norm among the corporate America, the income gap between the rich and the poor become more apparent. This was premised on the ratio of the average income of the top 20% of the population to the bottom 20% which stands at 8 times. This is higher compared to 4 times in Germany. Any mitigating factor? Based on the lists of 149 Trump policies, some of them may seems not feasible such as building a wall along the Mexican border and to allow states to legalise marijuana which can be counterproductive to a large extent. However, policies regarding infrastructure spending such as roads, bridges, tunnels, airports, railroads, ports and waterways and pipeline appears to be in line with jobs creation aspiration especially in the construction, steel, manufacturing and other sectors. For Internal Circulation Page 2
In addition, the state of America s infrastructure is quite appalling based on the rating by the American Society of Civil Engineers (ASCE). The ASCE has rated D+ on average for the state of infrastructure in the US which was due to delayed maintenance and underinvestment across most categories (see Table 2). The ASCE also put USD3.6 trillion worth of investment needed by 2020 in order to improve the state of US infrastructure by 2020. That is roughly close to 20% of 2016 nominal GDP. Therefore, infrastructure spending should help to improve US GDP growth and persistent reduction in US fiscal deficits to 2.5% in 2015 would allow the government to increase its deficits spending going forward (see Chart 3). Table 2: Infrastructure Grades for 2013 Infrastructure Grade Infrastructure Grade Energy D+ Schools D Public Parks C- Transit D Roads D Rail C+ Ports C Inland Waterways D- Bridges C+ Aviation D Wastewater D Solid Waste B- Levees D- Hazardous Waste D Drinking Water D Dams D A: Exceptional, B: Good, C: Mediocre, D: Poor, F: Falling Source: American Society of Civil Engineer (ASCE) Chart 3: US fiscal deficits as percentage of GDP 0.0-2.0-4.0-6.0-1.8-1.1-3.1-4.1-2.8-2.5-8.0-6.8-10.0-9.8-8.7-8.5-12.0 Source: US Congressional Budget Office (CBO) Impact to Malaysia 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 We believe risk aversion would ensue in the immediate terms. This would mean demand for safe haven currencies such as US dollar and Yen will become apparent. As such, the MYR/USD could test the median level of between +2 Standard Deviation (SD) and +3SD which is around RM4.29 in the near terms until uncertainties over Trump polices especially with regards to China and Muslim immigrants will be cleared (see Chart 4). For Internal Circulation Page 3
Chart 4: MYR / USD 5.00 4.50 4.00 3.50 +3SD: 4.4588 +2SD: 4.1183 +1SD: 3.778 Mean: 3.4373 3.00 2.50-1SD: 3.0968-2SD: 2.7563-3SD: 2.4158 2.00 Jul-05 Oct-07 Jan-10 Apr-12 Jul-14 Oct-16 In addition, we expect global central banks would become more dovish and stands ready to provide additional stimulus via reduction in the policy rates. In this regard, the BNM, as mentioned in previous publication, has the ability to reduce the Overnight Policy Rate (OPR) which currently stands at 3.00%. However, we believe the BNM would adopt a wait-and-see attitude in order to see how the financial market evolves and how it may impact the real sector. As it is, the liquidity in the banking system remains ample and the intermediation process continue to take place although loans growth has decelerated to 4.2% in September. However, this happens as banks have become more risks adverse in view of slowing economy. As such, we are still maintaining OPR at 3.00% in the upcoming monetary policy committee (MPC) meeting on 23 November. The 3Q2016 GDP will be announced on 11 November with median consensus estimates stands at 4.0% (2Q2016: 4.0%). However, we are somewhat optimistic as the 3Q2016 GDP growth could come in at 4.4% based on our estimates. This is premised on the stability in consumer spending as well as continued investment activities due to implementation of infrastructure projects. For Internal Circulation Page 4
Reference Litzinger P. J. and Dunn J. H. (2015) The Labour Force Participation Rate: A Reexamination of the Determinants Of its Decline The Journal of Applied Business Research Produced and issued by BANK ISLAM MALAYSIA BERHAD (Bank Islam) for private circulation only or for distribution under circumstances permitted by applicable laws. All information, opinions and estimates contained herein have been compiled or arrived at based on sources and assumptions believed to be reliable and in good faith at the time of issue of this document. This document is for information purposes only and has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. No representation or warranty, expressed or implied is made as to its adequacy, accuracy, completeness or correctness. All opinions and the content of this document are subject to change without notice and may differ or be contrary to opinions expressed by other business areas or groups of Bank Islam as a result of using different assumptions and criteria. No part of this document may be used, reproduced, distributed or published in any form or for any purpose without Bank Islam s prior written permission For Internal Circulation Page 5