Central America and Mexico are more exposed to American protectionist measures
Costa Rica, Salvador, Honduras and Mexico would be the countries most vulnerable to any import measures imposed by the United States, due to their close trade relations, particularly in the field of manufactured products. Furthermore, the GDP of these countries is more dependent on exports than other countries in the region.
Assuming the Trump administration begins to focus on countries with which the United States has large trade deficits, Mexico's position would be particularly delicate. In 2016, Mexico's trade surplus with the United States was exceeded only by China, Japan and Germany.
In 2016 in the region, only two of the other countries analysed, Ecuador and Colombia, had a trade surplus with the US and therefore could also be targeted by the US government. However this scenario is quite unlikely given their uneven and modest contribution to the total US trade deficit.
NAFTA in the sights
Uncertainties surrounding the North American Free Trade Agreement could also delay investment, especially reducing foreign direct investment. Donald Trump's threat to tax remittances from Mexican immigrants to their country of origin is another source of uncertainty. So far these resources have not been affected.
According to the Peterson Institute for International Economics, if NAFTA were repealed, the Peso would likely lose more than 25% of its value. Cars manufactured in Mexico would thus become more competitive in the United States, and this would increase the US trade deficit (the opposite of what the US government seeks to achieve).
Monetary repercussions
Even if Donald Trump is able to deliver on his campaign promises, it is unlikely that they will still lead to a rise in key interest rates in Latin America (with the exception of Mexico). Throughout 2016, inflation recorded a general increase in Latin America, in a context of difficult weather conditions, which put pressure on food prices. However, this trend petered out in 2017 as the central banks of Colombia, Chile, Peru and especially Brazil eased their key interest rates.
The assessment of the possible effects of Trumponomics on foreign currency debt must take into account the evolution of CDS2 and the recent trend of exchange rates in Latin American economies. From a nominal exchange rate perspective, no Latin American country has shown significant depreciation since Donald Trump's victory in the presidential elections. Again, it is the Mexican peso that has experienced the most volatility.
In 2016, the currency depreciated by 19% against the US dollar, but has recovered sharply since mid-January 2017, reaching its level in early 2016. “In a year marked by great geopolitical uncertainties, the effects of the new policy economic situation of the United States on Latin America and, in particular, on Mexico, remain one of the most sensitive observation fronts”, underlines Ernesto De Martinis, CEO of Coface Italia.
“The tightening of financial conditions envisaged by the plan, in fact, could have a considerable impact on the vulnerability of the area, even with unprecedented effects, of an even opposite sign compared to what is expected by the so-called Trumpnomics”, concludes De Martinis.
Attachments: FOCUS LATIN AMERICA
