On Nov. 8, Donald J. Trump confounded pollsters and political pundits by winning a majority of electoral votes, which will make him the 45th President of the United States. That timing coincides with a growing list of concerns for emerging-market sovereigns, ranging from the risk of an accelerated slowdown of China, a reversal of capital flows, to volatile commodity prices.
- Presidential-elect Donald Trump has signaled that he wants to pursue policies potentially leading to less open trade and immigration regimes.
- Should those policies be implemented, Central American sovereigns could be most at risk. We believe that Honduras could be the rated emerging market sovereign most at risk from a Trump presidency, followed by El Salvador, Nicaragua, Mexico, and Guatemala, all of which currently benefit from large exports to and worker remittances from the U.S.
- Nonregional emerging market sovereigns that might feel the economic reverberations of a Trump presidency include Vietnam, Philippines, Nigeria, and Cape Verde.
- For now we believe the pre-electoral rhetoric alone is insufficient to justify an adjustment of any emerging market sovereign rating or outlook.
The outcome of the presidential election brings another risk to the fore: the concern that the U.S., with $19 trillion dollars the largest economy worldwide, accounting for a quarter of the global total, could turn inward and reverse decades of what has been an era of globalization. During the campaign, Donald Trump clearly and repeatedly signaled his preference to pivot away from the open-market philosophy of traditional U.S. trade policy. He declared that he would not only not sign the TPP (Trans-Pacific Partnership) trade agreement with leading Asian nations, but would also renegotiate Nafta, the free-trade agreement with Mexico and Canada. This would effectively bring to a halt a sustained drive toward ever more open economic ties with U.S. trading partners worldwide.
He also told the electorate that he plans to make the U.S. a more closed nation for immigration and introduce policies that would encourage U.S. companies to bring production from overseas back to the U.S.
Assessing Dependence On U.S. Economic Openness
We acknowledge that announcements made during an election campaigns, whether in the U.S. or elsewhere, do not always carry through to actual policies. Given that Mr. Trump hasn't even taken office yet, it's impossible to say with a high degree of confidence what kind of politics the new president will pursue and what kind of necessary support from Congress he might obtain in actually legislating and implementing those policies. At the same time, we believe that Mr. Trump's unusually protectionist-sounding program merits an analysis about its effect on emerging-market economies and their sovereign ratings. To assess the relative vulnerability of emerging-market economies to a Trump presidency, we compare their dependence on U.S. economic openness by analyzing two simple external variables:
1. The share of an emerging-market economy's goods exports to the U.S. as a share of its national GDP. The hypothesis is that an emerging-market economy has more to lose from a Trump presidency if it sends more exports to the U.S. More limited access to the U.S. market would impact the growth and employment outlook for sovereigns in proportion to their current export values to the U.S. In some cases exports may be driven by commodities, such as oil, though U.S. protectionism is less likely to affect this type of trade than, for example, manufacturing exports. Nevertheless, should the more closed approach to U.S. policymaking lead to an economic slowdown, commodity exporters could be at risk of another negative terms-of-trade shock, hitting their exports as well. As a source we use 2015 (or the most recent) U.S. import data from the IMF's Direction of Trade Statistics.
2. The share of worker remittances resident in the U.S. in the emerging-market economy's total current account receipts. Should a Trump presidency indeed pursue a policy of limiting immigration and maybe expelling illegal immigrants already residing inside the U.S., this can hurt the balance of payments of the immigrants' home countries. Remittances of emigrants have been a large and relatively stable current account inflow for many developing economies, thereby stabilizing their sovereign ratings. An appreciable curtailment of remittances could therefore impact the stability of a sovereign's external accounts and thus affect its rating. The data is taken from the World Bank's "Migration and Remittances Handbook" database (May 2016 edition).