Key Risk in 2018? Consider the U.S.
Category: Column By : Haryanto T. Budiman Read : 312 Date : Thursday, December 07, 2017 - 08:22:26

For a year expected to be turbulent, 2017 has surprised. Volatility remained low while global stock markets rallied to all-time highs. The global economy looks robust, with all 45 economies tracked by the OECD expanding in synch for the first time since the 2007-2008 financial crisis. The quality of expansion is equally encouraging; J.P. Morgan expects the U.S. to grow 2.2% this year, the Euro area to expand 2.3% and China to advance 6.8%. Here in Indonesia, the economy is expected to hit about 5.2% growth.

With 2017 almost over, focus now turns to 2018. J.P. Morgan’s forecast sees global growth remaining above-trend through next year. A gradual climb in inflation will give central banks the latitude to slowly normalize and unemployment will continue to fall, bolstering consumption. For emerging economies like Indonesia traditionally sensitive to the external environment, some risks arise from U.S. monetary, fiscal and trade policies that could impact general growth.

Most immediate are U.S. interest rate hikes, with one expected this month, and potentially another three in 2018. The Federal Reserve has also begun winding down its $4.5 trillion balance sheet, at a monthly rate of $10 billion in the fourth quarter 2017 up to a maximum of $50 billion in the fourth quarter next year. While widely telegraphed and chances low of a repeat of the 2013 taper tantrum, these trends could still be undesirable for emerging markets.

Fiscally, the Trump administration appears to be making progress in implementing a comprehensive tax reform program. The Senate recently passed its fiscal year 2018 budget resolution, paving the way for a tax overhaul. The framework is extensive, including a cut of the corporate tax rate from 35% to 20%, a simplification of tax brackets, doubling the standard deduction, eliminating personal exemptions, and a tax incentive for a one-time repatriation of overseas corporate profits.

While tax reform could generate fresh U.S. growth, there is a clear external impact. For instance, the repatriation of corporate profits, if implemented, could impact the U.S. dollar’s global liquidity. Finally, Trump’s “America First” protectionism talk continues to concern many U.S. trading partners. While U.S. trade policies do not, for now, represent a radical shift towards pure protectionism, the administration has upped anti-dumping duties and initiated 65 anti-dumping and countervailing duty investigations from January to October this year, a sharp rise from the same period in 2016. As an example, the U.S. commerce department recently slapped hefty anti-dumping duties for biodiesel products from Argentina and Indonesia. With politics in focus for Indonesia in 2018 as gubernatorial elections start in the second half, the government will likely emphasize domestic issues such as bottlenecks in infrastructure spending and social programs. Therefore, one may wish to adjust strategy to manage the potential external headwinds in light of U.S. policy developments.  



`