Fitch: Unpredictability in Trump Administration Poses Risks

Biggest risks are from vows to break with long-standing US foreign policy on trade relations and immigration.

The unpredictability exhibited by the Trump Administration in the president’s  first few weeks in office “represents a risk to international economic conditions and global sovereign credit fundamentals,” warned Fitch Ratings in a memorandum released late last week.

Fitch is one of three major credit ratings agencies that evaluate the risk of investing in foreign sovereign nations. The agency said that since Trump became president, the predictability of US policy has waned, which could lead to “sudden, unanticipated changes in US policies with potential global implications.”

The biggest risks, Fitch said, come from the current administration vowing to break with long-standing US foreign policy on multiple issues, particularly concerning trade relations and immigration. It said that disruptive changes to trade relations, limits on migration, and confrontational exchanges between policymakers “contribute to heightened or prolonged currency and other financial market volatility.”

These potential risks, the agency argues, would stunt economic growth and put pressure on public finances that could “have rating implications for some sovereigns.” External financing difficulties, particularly if accompanied by currency depreciation, could also alter a country’s ratings.

The agency said that the countries most at risk from adverse changes to their credit fundamentals are those with close economic and financial ties with the US, and which are under scrutiny due to either existing financial imbalances, or perceptions of unfair frameworks or practices.

“Canada, China, Germany, Japan and Mexico have been identified explicitly by the administration as having trade arrangements or exchange rate policies that warrant attention,” said Fitch. “But the list is unlikely to end there.”

Any action the Trump administration takes that limit trade flows with one country will have cascading effects on others, according to Fitch. It added that regional value chains are especially well developed in East Asia, focused on China, and Central Europe, focused on Germany. Both countries have been accused of exploiting or manipulating their respective local currencies by Trump.

“In assessing the global sovereign credit implications of policies enacted by the new US administration, Fitch will focus on changes in growth trajectories, public finance positions and balance of payments performances,”  the agency said, “with particular emphasis on medium-term export prospects and possible pressures on external liquidity and sustainable funding.”

Fitch also warned that countries hosting US direct investment are at risk of being singled out by the Trump administration for punitive trade measures. The countries with the highest US investment in manufacturing are Canada, the UK, Netherlands, Mexico, Germany, China and Brazil.

Despite the warnings, Fitch pointed out that some elements of the administration’s domestic economic agenda were positive for growth, such as increased spending on US  infrastructure investment, deregulation, and tax cuts and reform – as long as they don’t cause the US government’s deficit and debt to balloon. It also suggested that the chaotic nature of the White House could just be a case of growing pains for a new administration.

“One interpretation of current events is that, after an early flurry of disruptive change to establish a fundamental reorientation of policy direction and intent, the administration will settle in, embracing a consistent business- and trade-friendly framework,” said Fitch.

Nevertheless, “the present balance of risks points toward a less benign global outcome,” Fitch said, citing the Trump administration’s exit from the Trans-Pacific Partnership, its objection to the North American Free Trade Agreement, its rebuke of US companies that invest abroad, and its accusations of currency manipulation against foreign countries.

“The full impact of these initiatives will not be known for some time, and will depend on iterative exchanges among multiple parties and unforeseen additional developments” said Fitch. “In short, a lot can change, but the aggressive tone of some administration rhetoric does not portend an easy period of negotiation ahead, nor does it suggest there is much scope for compromise.”

-Michael Katz