Trump’s second term poses challenges for the Gulf

A lot has been written in the last few months about whether the Gulf states prefer a Trump or Harris presidency. They have naturally kept their cards close and prepared for either outcome, maintaining relations with both camps. 

Now, as the dust settles, it is clear that the polls underestimated Trump’s support for a third time. He has won all seven of the swing states, which it was thought were largely toss-ups, and he has secured a majority in the national popular vote. 

Economically, there are likely to be both costs and benefits for the GCC. One of the most significant negatives will be higher borrowing costs for both companies and governments.

This is because the Gulf states’ interest rates are closely tied to those in the US, through the currency peg, and bonds and sukuk are priced relative to US Treasuries.

Trump’s economic and social policies are likely to be inflationary, which would probably cause the Fed to pause further interest rate cuts and possibly even consider new hikes.

Inflation has nearly returned to the Fed’s target of 2 percent, allowing it to cut rates in September to 5 percent. It implemented a further 25-basis-point cut on Thursday and had previously been expected to make about 150bp in cuts over the coming year. Now it may be more cautious.

Treasury yields dipped on Tuesday evening, when the outcome initially looked hopeful for Harris, but then jumped sharply as soon as it became clear Trump was leading.

Part of the rationale for this is that Trump’s proposed tax cuts may not be matched with sufficient spending cuts and so will further increase the US’s deficit and debt load. 

Perhaps his actual fiscal policy will prove more balanced, but this is of concern to the GCC both as large holders of US Treasuries and because their own debt issuance is priced against supposed “risk-free” yields.

The energy sector is somewhere one may presume alignment between petrostates and a climate change-denying president who loves to chant, “Drill, baby, drill”.

However, since his first term the Gulf states have increasingly embraced the energy transition. It is plausible that a future UN climate change summit could have Gulf states and the EU aligned in their positions, with the US as the spoiler.

Deregulation of the liquefied natural gas sector, where Biden had paused new project approvals, could benefit those Gulf states that invest in US terminals, but it will increase competition for exports from Qatar, UAE and Oman.

The picture for oil is mixed. A slowdown in the US transition to electric vehicles is supportive of oil demand, although Trump’s bromance with Tesla CEO Elon Musk means that there may not be as great a rollback in support for EVs as had seemed likely.

More immediately, tighter enforcement of sanctions on Iran is likely to reduce supply, supporting prices, although Biden has been trying to do this in recent months, without much impact.

The Gulf will need to navigate the impact of Trump’s foreign policies on the region and the wider world

It may be that deregulation under Trump supports even more rapid increases in production in subsequent years, although there is a significant lag between policy changes and output.

In this case, Saudi Arabia and others may decide to shift away from limiting production, as they have been doing now for nearly eight years, and instead boost output to build market share.

Each of the Gulf states has specific areas of partnership with the US that will be re-examined as a result of the change in administration. 

Biden had been trying to negotiate a broad agreement with Saudi Arabia that includes certain defence guarantees, support for the development of nuclear power, and access to artificial intelligence technology.

The original plan had been for this to be paired with normalisation with Israel, continuing the Abraham Accords policy that Trump launched. 

However, Saudi Arabia has always been clear that such a trilateral deal requires progress towards Palestinian statehood, something that has become ever more improbable. The question is whether there could be a bilateral deal instead. Trump views himself as a dealmaker and has more scope to get something through the Senate.

The UAE has forged a deep partnership on AI and is reportedly close to receiving deliveries of advanced Nvidia chips; the US has been restricting exports of these chips to prevent China from gaining access to them.

Trump is likely to remain supportive of this partnership, but another one, in which the US and UAE committed jointly to finance 100 gigawatts of renewable energy, could be deprioritised.

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Meanwhile the Gulf will need to navigate the impact of Trump’s foreign policies on the region and the wider world. Perhaps the only thing that can be predicted about this is that they will be erratic and suspicious of multilateralism.

By contrast, the Gulf states’ open economies thrive in an interconnected and multipolar world, where they have been developing an influential role as “middle powers”, both economically and politically. Trump may put more pressure on them to pick sides.

Trump got on fairly well with the Gulf states in his first term, but may not appreciate the ways they have changed since then, including greater unity within the bloc.

Relations will be helped by the fact that the Gulf states have maintained contacts with Trump’s circle over the past four years, such as investing in Jared Kushner’s fund. They have stepped up engagement in recent months, including Qatar’s emir and the UAE president visiting Mar-a-Lago in September. 

While Gulf leaders may see some advantages in Trump’s win, they will also have concerns, including those discussed here, and so they have been carefully preparing to navigate them.

Justin Alexander is the director of Khalij Economics and the GCC analyst for Global Source Partners, providing analysis to emerging market investors and governments. His Gulf Weekly newsletter is published on LinkedIn.