Rodrigo Campos
NEW YORK (Reuters) – Former President Donald Trump’s possible return to the White House in November has investors preparing for a range of scenarios, putting “America’s backyard” at the top of the list of markets to watch.
The Trump administration has had a cold relationship with many Latin American countries, including during the distribution of COVID-19 vaccines and when the U.S. government withheld key financial aid in exchange for tougher immigration policies in Central America.
Here are some issues investors have identified as they anticipate how a second Trump administration will affect the region.
Good Neighbor
Mexico has long been an emerging market weather vane for U.S. policies and their impact on the broader emerging market, but this time domestic factors will make the situation more complicated.
Following Trump’s victory in the 2016 presidential election, the peso fell about 8% in a week.
But this time, the peso has already fallen 6 percent this year since it crashed in June when the ruling party came close to winning a majority in the country’s elections, as markets worried about constitutional reform and a weakening of checks and balances.
Trade is expected to top the agenda in U.S.-Mexico relations, analysts say. President Trump has led a revision of the United States-Mexico-Canada (USMCA) trade agreement, with a scheduled review due in two years. The next U.S. president will have a chance to see whether his country stays in the pact.
“It is highly unlikely that President Trump will withdraw from USMCA, but he could threaten to do so in order to induce higher tariffs and further investment in U.S. manufacturing,” said Hasnain Malik, head of equity research at Tellimer in Dubai.
“More broadly for Mexico, President Trump’s focus on border control could hurt long-term growth in remittances and make relations between the two countries less comfortable.”
The peso is expected to be volatile ahead of the U.S. presidential election as traders use it to hedge or bet on Biden’s chances of being re-elected.
Personal Relationships
Two of Latin America’s most flamboyant right-wing populists, El Salvador’s President Najib Bukele and Argentina’s President Javier Milley, attended the Conservative Political Action Conference in February, the largest gathering of U.S. conservative activists and politicians, with Trump. Both countries are seeking financial assistance from the Washington-based International Monetary Fund.
In 2018, Trump openly supported Argentina’s then-President Mauricio Macri in seeking financial assistance from the IMF, which turned into a massive $44 billion program. Millay, an outspoken Trump supporter, is widely expected to ask for new funding once the current program ends in December or sooner.
El Salvador’s president, Bukele, is also expected to renegotiate with the IMF for a new program after the U.S. election. In April, El Salvador offered to issue bonds with rising yields if it didn’t get a new IMF program within the next 18 months or if its credit rating didn’t improve significantly, a move analysts saw as a gamble by Bukele that Trump would win the White House and speak favorably of him at the IMF.
“(President Bukele) has very close ties to the Republican Party,” said Tis Lowe, a portfolio manager at NinetyOne, adding that El Salvador was also looking in other countries for new fundraising.
“I expect that with a Trump administration in place, they will turn to the IMF and the IMF will be much more accommodating to them.”
Venezuela sanctions outlook
The outcome of Venezuela’s presidential election on July 28 could determine whether the country can return to the international community. During his previous term, Trump strengthened sanctions against the South American oil-producing nation, but Biden has sought to repair relations with the aim of ensuring fair elections.
Venezuela owes at least $60 billion in sovereign debt alone, and the next U.S. president will likely decide whether to pursue a major debt restructuring, which would require issuing new bonds that are currently prohibited by U.S. sanctions.
“Venezuela is one of the countries likely to be affected by change under a Trump administration,” said Bradley Wickens, CEO of Broad Reach Investment Management, adding that Venezuelan bonds, which are trading at very low prices, may be attractive to investors given the easing of tensions between Washington and Caracas.
“I don’t know if that will continue under the Trump administration.”
Relations with Cuba and Nicaragua, both led by authoritarian governments, are also expected to become more strained under a Trump administration.
China trade war escalates
Obstacles and extra costs to trade with China imposed during the Trump administration have been maintained by Biden, who has stepped up pressure on Beijing.
Some analysts expect that if the trade war with China escalates, Beijing may choose to devalue its currency to make its exports more competitive. Such a move could affect Latin American commodity exporters, with Brazil, Argentina, Mexico and Chile being China’s largest trading partners in the region.
(Reporting by Rodrigo Campos and Libby George; Editing by Jamie Freed)
