A U.S. administration led by president-elect Joseph Biden may promote constructive U.S. re-engagement with Latin America, although the near-term focus in both the U.S. and Latin American countries will remain on domestic issues, Fitch Ratings says. Rebuilding alliances, pursuing multi-lateral cooperation, and improved U.S. policy predictability could help support many countries in Latin America as they attempt to recover from the coronavirus.
As the world’s largest economy, issuer of its dominant reserve currency, and pre-eminent diplomatic and military power, the U.S.’s policy choices often have meaningful impacts on other Fitch-rated sovereigns, and its proximity means Latin America can be strongly affected. The new president’s approach to the region may take time to emerge as he assembles his administration and focuses initially on challenges stemming from the pandemic and its impact on the U.S. economy.
However, certain policy initiatives that are likely to be a priority, notably a new domestic stimulus bill, would be positive for Latin American economies. Fitch says that it assumes a further round of stimulus spending is passed in 1Q21 after the presidential transition, but that this will be capped at around USD1 trillion, assuming Republican control of the U.S. Senate. Cementing the U.S. economic recovery would support Latin American exports as well as remittance flows to Mexico and Central America. Many Latin American sovereigns will benefit from continued loose U.S. monetary policy, allowing those with external market access to borrow relatively cheaply.
Latin America could continue to benefit from re-shoring as the U.S. seeks to reduce its businesses reliance on Chinese suppliers. China’s own economic recovery will be a significant determinant of commodity prices.
U.S. competition with China will remain an important factor for the region. While attempts to counter Chinese influence could involve greater deployment of U.S. development funds and private investment, there may be tensions, for example regarding Chinese business interests and investment in the region, like in the telecoms sector. Latin America could continue to benefit from re-shoring as the U.S. seeks to reduce its businesses reliance on Chinese suppliers. China’s own economic recovery will be a significant determinant of commodity prices.
Governments in Latin America will also be preoccupied with domestic policy, including protecting public health and restarting stalled economies against a background of wider budget deficits, large public debt overhangs, low commodity prices, structurally weak growth and potential political and social tensions resulting from weakened social indicators. The strength of economic recoveries and credibility and success of efforts to stabilize public debt ratios will remain key drivers of Fitch’s Latin American sovereign ratings assessments.
In the medium term, greater engagement under a Biden presidency could be significant for the Northern Triangle countries under his four-year USD $4 billion regional strategy for Central America. This seeks to address root causes of migration, mobilize private investment, reduce corruption, improve security and the rule of law, reduce poverty and boost economic development. Progress toward these aims could support sovereign credit quality over time, but implementation challenges are significant.
The incoming administration will take a more conventional approach to diplomacy. For example, President-elect Biden is likely to use less aggressive rhetoric toward Mexico regarding migration. Further disruption to the framework for U.S.-Mexico trade is unlikely. President-elect Biden supported the renegotiated U.S.-Mexico-Canada trade agreement, on which members of the Democratic Party had significant input, reflected in its improved labor protections (although the new U.S. administration may push for stricter compliance).
However, this does not eliminate potential friction with individual countries on specific issues, such as the new U.S. administration’s environmental policies. These could be a source of friction with Brazil, for example, although the relationship between the two countries is based on shared interests and strong private sector links. U.S. relations with individual Latin American sovereigns may also be influenced by the outcome of upcoming elections in the region.