Written by Rodrigo Campos
NEW YORK (Reuters) – The possibility that former President Donald Trump could win back the White House in November has investors preparing for different scenarios, with “America’s backyard” at the top of the list of markets to watch.
The Trump administration’s relations with most Latin American countries have been tense, 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 the tension points identified by investors anticipating how a potential second Trump administration would impact the region:
good neighbor
Mexico has long been a bellwether for how U.S. policy affects emerging markets more broadly, but this time domestic factors could make the situation more complicated.
Trump’s 2016 election victory sent the peso down about 8% in a week.
But this time, the peso has already fallen 6% this year after falling in June when the ruling party came close to winning a landslide in the country’s elections, with markets fearing constitutional changes and reduced checks and balances.
Trade is expected to top the agenda in U.S.-Mexico relations, analysts say. Trump has led the charge to renew the U.S.-Mexico-Canada trade agreement, which is due for review in two years. The next U.S. president will have a chance to confirm whether the country will remain committed to the agreement.
“Trump is very unlikely to pull out of the USMCA, but he may threaten to do so in order to extract higher tariffs and more inward investment in US manufacturing,” said Hasnain Malik, head of equity research at Tellimer in Dubai.
“For Mexico, and more broadly, the relationship will be less comfortable, as Trump’s focus on border controls is likely to hurt remittance growth in the longer term.”
The peso is expected to be volatile ahead of the US election as traders use it to hedge or double down on the possibility of Biden being re-elected.
Personal relationships
Two of Latin America’s most prominent right-wing populists — Salvadoran President Nayib Bukele and Argentine President Javier Milei — joined Trump at the Conservative Political Action Conference in February, the largest gathering of conservative activists and politicians in the United States. Both countries are seeking financial support from the Washington-based International Monetary Fund.
In 2018, Trump openly backed then-Argentine President Mauricio Macri in his push for IMF money, which evolved into a massive $44 billion program. Milley, an outspoken Trump supporter, is widely expected to ask for new money once the current program expires in December — if not sooner.
Salvadoran President Bukele is also expected to resume engagement with the IMF after the U.S. election, with the goal of securing a new program. Analysts saw El Salvador’s April bond offering that would boost yields if the country failed to secure a new IMF program or a significant credit rating upgrade in the next 18 months as Bukele’s bet that Trump would win the White House and put him in good company at the IMF.
“Bukele is very close to the Republicans,” said Thies Lowe, portfolio manager at Ninety One, adding that El Salvador is also trying to find new funding elsewhere.
“The hope is that once the Trump administration comes in, they will put pressure on the IMF, and the IMF will be more lenient with them.”
Prospects for sanctions on Venezuela
How Venezuela’s presidential election on July 28 turns out will likely determine whether it has any chance of rejoining the international community. In his previous term, Trump tightened sanctions on the South American oil producer; Biden has tried to reestablish ties with the goal of ensuring fair elections.
The next US president will likely decide whether to restructure the massive debt — Venezuela owes at least $60 billion in sovereign bonds alone — because it requires issuing new bonds, which is currently prohibited by US sanctions.
“Venezuela is one of those countries that is likely to undergo change under the Trump administration,” said Bradley Wickens, CEO of BroadReach Investment Management, adding that Venezuelan bonds trading at very low prices could be attractive to investors on the back of the detente between Washington and Caracas.
“I’m not sure that will continue under Trump.”
Relations with Cuba and Nicaragua, both ruled by authoritarian governments, are also expected to become more tense under the Trump administration.
Escalation of the trade war with China
Biden has maintained the additional barriers and costs to trade with China imposed during the Trump administration, and has increased pressure on Beijing.
Some analysts speculate that if the trade war with China escalates, Beijing may choose to devalue its currency to make exports more competitive. Such a move could be felt by commodity exporters in Latin America, where Brazil, Argentina, Mexico and Chile are among Beijing’s biggest regional trading partners.