A fearful Latin America hopes Trump’s policies will be different than rhetoric.

BY JOACHIM BAMRUD

Last week, Mexico's peso experienced its biggest two-day tumble in more than 20 years, while currencies in Brazil and Colombia also fell.

Meanwhile, Mexican bonds and stocks had their worst day in five years and Brazil’s Ibovespa fell the most in a month while Colombian stocks also were hit.

All because of the results of the November 8, 2016 presidential elections in the United States, which saw Donald Trump as the winner.  Trump has promised to renegotiate or exit the North American Free Trade Agreement (NAFTA) and impose 35 percent tariffs on imports from Mexico, threatening to cause a potential trade war. He has also vowed to deport millions of illegal immigrants and build a wall between the United States and Mexico.

“He will likely intervene less in what Latin Americans consider their own internal affairs, but he also may make decisions that could have broad effects on the region’s economy, such as his desire to avoid the dollar being too strong and wanting to manage interest rates, as well as his criticism and skepticism regarding the [Trans-Pacific Partnership ],” says Frank Holder, Head of Latin America at Berkeley Research Group.  “Finally, his stance on immigration could have a material impact on the region as well.”

While it is not yet clear to what degree Trump will implement his campaign promises once he assumes office on January 20, 2017, the uncertainty alone has already put a dent in Latin American capital market activity and caused corporate executives to prepare for changes.

Brazil's BM&FBovespa CEO Edemir Pinto, said Monday that market volatility caused by Trump's victory may force some Brazilian companies to delay their share-listing plans, Reuters reports. On Thursday, Mexico's finance ministry said that it would cut the amount of long-term peso bonds it would offer during the rest of the fourth quarter after the outcome of the U.S. presidential election increased market volatility, according to another report from Reuters.

Brazil’s well-respected Finance Minister Henrique Meirelles warns that Trump's administration may raise funding costs for emerging countries and hurt economic growth if the U.S. president-elect's policies match his campaign rhetoric.

The irony is that the United States is shifting course towards protectionism just as Latin America is rolling back the same policies and countries like Brazil, Argentina and Peru were seeking closer U.S. relations.

“The paradox …is that while Trump is betting on restricting free trade, in Latin America presidents like [Argentine Mauricio] Macri, Brazilian Michel Temer and Peruvian Pedro Pablo Kuczynski are leading a wave in favor of open trade and closer ties with the United States that hadn’t been seen in the region for many years,” Spanish newspaper El Pais commented.

Fittingly, when Brazil's government on Wednesday congratulated Trump on his victory, it also called on him not to resort to protectionism as the South American nation strives to boost trade to overcome a severe recession, according to Reuters.

"Trump's protectionist agenda, as outlined during his presidential campaign, would be highly damaging for Latin America if fully implemented," global consultancy IHS warned today.

The TPP would have linked the United States with 11 countries in Asia, South America and the south Pacific, including Mexico, Chile and Peru.

Riordan Roett, Director of the Latin American Studies Program at SAIS-Johns Hopkins University, says the TPP is “dead as a door nail.”

“Trump and his acolytes and his base believe globalization is the root of all evil and trade agreements are at the base of that evil,” he says.

A spokesperson for The International Monetary Fund told Latinvex that it does not plan to revise its latest economic forecasts for 2016 and 2017 until January, but private sector analysts are already revising down GDP estimates for Latin American countries. Meanwhile, several analysts also believe the US economy will be hurt by Trump’s policies. Bank of America Merrill Lynch cut its already lukewarm estimate for U.S. growth in the first six months of 2017 on the belief that trade restrictions adopted by a Trump administration will outweigh an increase in government spending, MarketWatch reported.

A slowdown in the US economy would mean a reduction in imports from Latin American goods and services. Although Trump’s infrastructure plans may boost imports of copper from Latin America, as John Price, managing director of Americas Market Intelligence, points out. (See Trump: The New Yankee Threat).

And uncertainty around Trump’s policies could also lead to a sustained gold rally, which would benefit gold exporters like Peru, Semana Economica reports.

MEXICO: THE BIG LOSER

While Latin America as a whole will be impacted by a more protectionist United States, Mexico is clearly the biggest loser.

Mexico is the third-largest exporter to the United States after China and Canada and last year exported goods worth $294.7 billion to the US market, a 0.2 percent increase from 2014, according to US Census Bureau data analyzed by Latinvex.

“Trump could actually exit NAFTA without needing Congress to do it, but it would be a messy affair,” Holder says.  “It would almost certainly end up in court.  It could also generate a trade war, which would be damaging to US companies as well.  What is most likely is that he will try and modify certain aspects of it without trashing the whole agreement.  For example, the automotive industry might be an area of focus.”

US exporters to Mexico would clearly be hurt from retaliation by Mexico’s government. Mexico is the second-largest export market for the United States, only slightly behind Canada.

“Canada and Mexico should - will - oppose any unilateral action by Trump," Riordan says. " If [Trump] does impose tariffs, so will they."

HSBC and Santander on Monday both cut their growth outlook for Mexico next year on expectations that Trump's rise to the U.S. presidency could hit investment and consumer confidence in Latin America's No.2 economy, Reuters reports. Mexico's top private bank Citibanamex did so last week.

Morgan Stanley analysts said in a note that the fallout from a Trump presidency would have "deep ramifications" for the Mexican equity market and that foreign investment could stall.

Trump's proposed cancelation or renegotiation of NAFTA and other increased trade protectionism measures pose varying degrees of credit risk to Mexican corporate bond issuers, according a new Fitch Ratings report.

"Mexican industrial activity is strongly linked to the U.S. economy given the countries' geographic proximity. Mexico has functioned as a natural industrial hub to the U.S. under the NAFTA framework," Fitch director Jay Djemal said in a statement. "Given this link, protectionist policies, if enacted by U.S. authorities, and FX risk could impact some Mexican corporate credit profiles. However, other companies might benefit from some of the proposed policies such as increased infrastructure spending."

America Movil, Axtel, Famsa, Grupo Televisa, ODM, Servicios Corporativos Javer, and TV Azteca all have varying yet significant degrees of exposure to Mexican peso devaluation against the US dollar, Fitch says. Meanwhile, Fibra Terrafina and Fibra Uno are exposed to potential protectionist measures due to their ownership of industrial parks, which serve the needs of many multinational companies and Mexican exporters and Controladora Mabe is at risk of tariffs being levied across its range of white goods due to approximately 30 percent of its exports sold to the United States, Fitch points out.

Companies are now preparing to shift manufacturing and supply strategies. Swiss food giant Nestle may adjust its supply chains and export strategies if Trump imposes new taxes on products made south of the border, according to Bloomberg. Meanwhile, Motorcar Parts of America (MPA), is mulling a possible move of its Mexican operations to either California or Malaysia, El Financiero reports. MPA is one of the largest auto part producers in North America.

BRAZIL: UNCERTAIN RECOVERY

Brazil, Latin America’s largest economy, is also being impacted.

The real weakened more than its peers on Monday as traders' concerns over the election of Trump as U.S. president drove investors to seek safer investments ahead of a local holiday, Reuters reported. That followed losses all last week. The “trump Effect” is raising concern among Brazilian officials, Exame reports.

Meanwhile stocks have been hit as well. On Friday, the Ibovespa fell the most in a month as investors dumped Brazilian stocks, Bloomberg reported.

Brazil's Treasury said on Monday it would cancel an auction to sell LTN and NTN-F bonds scheduled for Wednesday and instead buy NTN-F bonds expiring in 2021, 2023, 2025 and 2027, in response to market volatility, Reuters reports.

While Brazil depends much less on trade with the United States, the government is betting on US investments to help the economy recover. It also hopes Brazilian companies – including state oil giant Petrobras – will be able to succeed in capturing needed capital through local and international capital markets.

Now both are under threat as uncertainty hits US multinationals and investors alike.

ARGENTINA: CAPITAL MARKETS HIT?

More than Brazil, Argentina was betting on capital markets to help boost its recovery. After seeing a wave of bonds this year, both policymakers and companies alike were looking forward to an even stronger 2017.

The head of JPMorgan Chase & Co in Argentina expects Argentina to see IPOs worth $5 billion next year despite Trump's victory in US elections, mainly from real estate and agro companies, Bloomberg reports. The outlook stands firm as long as a Trump Administration doesn't hike up interest rates. 

However, the uncertainty caused local market economists to recommend that the government stop issuing debt for at least 60 days to wait and see how the market reacts to Trump, Cronista reports.

The good news is that since reaching an agreement with bondholders earlier this year, Argentina’s government raised $20 billion, enough to cover its financing needs until February. That gives Macri time to ride out the storm, Walter Stoeppelwerth, chief investment officer at Balanz Capital, told Bloomberg.

Meanwhile, Trump is also expected to impact US-Cuba relations, which had improved under outgoing President Barack Obama.

“He will almost certainly roll back relations,” Holder says.  “He has made it clear he is not opposed to a deal for rapprochement, but he does not agree with the current agreement in place.”

WATERED DOWN TRUMP?

Policymakers in Latin America are pinning their hopes on that Trump will prove to be more pragmatic and water down many of his campaign pledges, including his threats against NAFTA.

Mexico's government is optimistic that Trump will be more appreciative of the benefits of the U.S.-Mexico relationship as president than he was as a candidate, deputy Foreign Minister Paulo Carreno told Bloomberg News.

“One thing is training for the game; another is actually playing it,” Brazilian Foreign Minister Jose Serra said.

And Argentine economists say Trump may not be able to be as protectionist as he has vowed because free trade still has strong support from the Republican Party, which will control Congress, La Nacion reports.

“The Republican Party is staunchly pro-free trade,” Walter Molano, head of research at BCP Securities, wrote in an analysis to clients. “They rely heavily on the patronage and support of traditional multinational corporations. Therefore, they will not be keen on making major modifications to the North American Free Trade Agreement (NAFTA)….This means that some of the concerns about the future of the Mexican economy and the MXN may be overblown.” 

Meanwhile, World Bank senior economist Joost Draaima points out that Mexico is sufficiently strong to withstand the uncertainty around Trump, including international reserves of $176 billion, a credit line with the IMF and solid fiscal and monetary policies, Milenio reports. 
 

IHS says signs of a where Trump will go can be seen in whether or not he picks cabinet members with protectionist backgrounds.

However, even if Trump waters down his threats against NAFTA, increased border security will likely hurt US-Mexican trade, according to IHS.

“Should border security significantly increase, it could lead to cargo delays for companies reliant upon movement of goods across the border,” it said last week. 

© Copyright Latinvex

SEE ALSO

US-Mexico Trade: The Numbers

Trump: The New Yankee Threat

Pained Reflections on a Trump Victory

Ex-Ambassadors Warn Against NAFTA Changes

Hills: Losing Mexico Market Would Be Devastating

Farnsworth: Trump & Latin America 

Fact Check: Donald Trump Wrong on Mexico

The Cost of a US-Mexico Trade War

NAFTA: The Benefits Versus The Costs