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Treasury Management

Trump Impact: Taxes, Rates, Emerging Markets

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November 09, 2016

Repatriation tax holiday in store for MNCs? And will the Fed pull the trigger in December? EM on shaky ground.

Tragedy and comedyDonald Trump’s upset victory Tuesday night has many treasurers thinking about what the effects will be going forward. How will Making America Great again impact taxes, interest rate policy and emerging markets?

Treasurers are already thinking about the real possibility of a repatriation tax holiday for funds stashed overseas. That’s because Mr. Trump has previously proposed slashing taxes for corporations. Notably, he would reduce the top corporate income tax rate of 35 percent to 15 percent – down from the current 35%.

Perhaps more importantly, he has advocated for a special corporate tax repatriation holiday rate whereby corporations with money they say is trapped overseas would be able to pay a tax rate of just 10% on that income. A holiday would be a big benefit to companies like Microsoft, Apple and GE, among others, who collectively hold part of the upwards of $2.5 trillion currently estimated to be held overseas.

The possibility of a repatriation tax holiday even has the NeuGroup’s second Treasury Investment Managers’ Peer Group (TIMPG2), set to meet November 15-16, 2016, changing its agenda so it can discuss what’s in store on the repatriation front.

“The prospects seems good for tax reform, now that the two branches of government are unified,” said Peter Connors, a tax law Partner with Orrick, Herrington & Sutcliffe LLP. “Tax Reform is clearly on Trump’s agenda. Senator [Orrin] Hatch is supportive of a territorial system.” However, Mr. Connors said, a repatriation holiday may be a tougher goal to achieve. Sen. Hatch “seems skeptical of a repatriation holiday though, given the cost projections. Some have said that a proposal tied to infrastructure investment would have a better chance of success.”

The Fed is reportedly set to raise rates at its December meeting but Mr. Trump’s victory has front run the FOMC action, pushing rates higher. The benchmark 10-year Treasury yield surged to an eight-month high, while the benchmark 30-year yield hit 2.80% for the first time since January.

So will they or won’t they come December? Interest-rate futures show that the market is already pulling back its expectations for a December rate hike to below a 50% possibility. Still, Mr. Trump has been a vocal critic of Fed Chairman Janet Yellen for keeping rate slow and has said recently that it wasn’t raising rates at the behest of the White House. “Janet Yellen should have raised the rates. She’s not doing it because the Obama administration and the president doesn’t want her to,” he said November 3, according to the Wall Street Journal.

However, others see it differently. The Trump victory, “raises the odds that the Fed will not move in December,” said Mark Zandi, chief economist of Moody's Analytics, according to CNBC. Others say the economic data warrants a rate hike.

In either case, looking ahead, the relationship between a Trump administration and the Fed could be acrimonious.

Emerging Markets
Mr. Trump’s trade threats are certainly a threat to emerging market economies. The strong dollar over the past year or so already put many emerging market economies on edge; a halt to trade could be more devastating. The main concern is that if a Trump administration follows through on its trade threats, i.e., renegotiating NAFTA or scrapping the TPP, it would harm developing nations that sell their goods in America.

In September, Citigroup released a report saying that the MSCI Emerging Market Index would fall by about 10 percent if Trump wins, in part because emerging market currencies would weaken against the US dollar. After the win, the MSCI slid 2.4% as Mexican and Brazilian shares took a dive.

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