Asian Economies May Gain Most From ‘Bolton Effect’

Departure of US security hawk lowers the risk of war and has changed the dynamic in energy markets

William PESEK

Turns out, John Bolton is good for something: brightening the outlook for Asia’s inflation and growth.

Oil prices fell $1 per barrel within hours of news US President Donald Trump either demanded or accepted the resignation of his uber-hawkish national security adviser. Bolton had been angling behind the scenes for 17 months to invade every place from Iran to Venezuela. He did his best to break up Trump’s “love” affair with Kim Jong-un.

Bolton’s sudden departure has already changed the dynamics in energy markets. Punters spent much of 2018 – Bolton started in April of last year – pricing in military misadventures. In June, for example, bombers were actually en route to Iran – until Trump thought better of it and called off the airstrike.

For now, sliding oil prices is the best news Asia’s trade-reliant economies have received in those 17 months. On top of Trump’s trade war, oil’s 20% surge this year has been an intensifying headwind from Japan to Singapore. It’s been the added hit China didn’t need as Trump’s tariffs send growth to 27-year lows.

For nations facing dual budget and current account deficits, higher energy prices only add for financial strains. The “Bolton effect” is a load off for governments from India to Indonesia to the Philippines. They face their fair share of inflation spikes over the last year. They all have something else in common: epic infrastructure booms necessitating increased energy imports.

Those with healthier balance-of-payments positions – Malaysia, South Korea and Taiwan – have been less vulnerable to this year’s market chaos. Here, too, less worrying about Bolton-instigated clashes in the Strait of Hormuz, South America, the Korean peninsula or elsewhere are a plus for top-line Asian growth. It’s one less major risk factor for executives planning investments and compensation for 2020.

Relief factor

There are other factors that could work in Asia’s favor. The relief-factor in Washington might offset Saudi Arabia’s efforts to hike prices ahead of the initial public offering of Aramco, the world’s most profitable oil company. So might a slowing US. Earlier this week, the US Energy Information Administration cut its outlook for oil consumption. It now expects global demand of about 900,000 barrels per day this year, which could be the weakest period since 2011.

Yet the Bolton news “tapped the brakes on prices” in ways sure to cheer investors and governments alike, says Ben Geman of Washington-based Axios news and data site.

There’s still a question of who Trump hires to replace Bolton, says Cliff Kupchan of Eurasia Group. “But,” he adds, “several key policy issues will probably take [a] less hardline. Regarding Iran, Bolton has been ‘Dr No’ when it comes to talks with Iran.

Trump, by contrast, says he hopes to meet with Iranian President Hassan Rouhani. Bolton’s departure, meantime, means that even as Pyongyang expands its nuclear program, the odds of “fire and fury,” as Trump once put it, are declining.

“Bolton never bought the idea of talks,” Kupchan says. “The US is now even more likely to accept Kim’s demand for a phased approach to talks, and formal negotiations seem poised to restart. A breakthrough deal involving Kim agreeing to abandon his nuclear arsenal, however, remains very unlikely.”

Any U-turn in Afghanistan policies could, at least in the short run, reduce the uncertainty factor. Getting a key architect of the 2003 Iraq invasion girding for any number of clashes out of the West Wing is dollar-positive.

Yet Bolton is just a symptom of the Trumpian chaos roiling markets. As analysts at ClearView Energy Partners argue: “We would caution against the a priori conclusion that a post-Bolton administration might materially pivot from those positions.”

Who knows, Trump might replace Bolton with an even bigger hawk.

Good for Manila, Jakarta

Lower oil prices, though, would act like a stealth tax cut for households and smaller businesses. They offer Rodrigo Duterte an insurance policy against runaway inflation in the Philippines. They will aid Indonesia’s Joko Widodo in taming local bond markets and boosting investor confidence.

For Japan’s Shinzo Abe and South Korea’s Moon Jae-in, calmer energy makers are always a plus for their resource-poor economies. And in a year in which so little is going China’s way, lower import prices give Xi Jinping’s a bit more latitude to let the yuan slide.

Even on Trump’s island of misfit toys, Bolton was a particular standout for the way he made the world a riskier place. His departure is the best news Asia’s economies have received in quite some time.

Strategic Culture

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