US election & Latin America: what’s at stake? - Capital Economics
Latin America Economics

US election & Latin America: what’s at stake?

Latin America Economics Update
Written by Nikhil Sanghani
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The result of Tuesday’s US election is unlikely to be as important for Mexico as it was four years ago, with domestic factors remaining key to its bleak economic outlook. However, Biden’s climate change agenda could raise tensions with Brazil, and dampen the prospects for oil producers in Latin America.

  • The result of Tuesday’s US election is unlikely to be as important for Mexico as it was four years ago, with domestic factors remaining key to its bleak economic outlook. However, Biden’s climate change agenda could raise tensions with Brazil, and dampen the prospects for oil producers in Latin America.
  • Our US Economics Focus outlines what the outcome of the US election might mean for the US economy and policymaking environment. There are three main policy areas which matter for Latin America – trade, energy and fiscal policy.
  • Mexico will be most affected by US trade policy, though the risks for the country are far lower than they were in 2016. Four years ago, President Trump’s aggressive rhetoric against its southern neighbour and promises to pull out of NAFTA were major concerns for Mexico’s outlook. The stakes aren’t so high now. Trump’s campaign in the run-up to this year’s election has had notably little mention of Mexico. And, were he to win, it’s unlikely that Trump would pull apart NAFTA’s replacement, the USMCA (T-MEC), which his administration spent years negotiating.
  • That said, Mexico wouldn’t be totally out of the woods. It runs a large goods trade surplus with the US (see Chart 1), which could again catch the eye of Trump and prompt a renewed threat of tariffs. There would also be trade risks for Mexico if Biden wins, even though he would adopt a less aggressive approach. Indeed, the Democrats may push for stricter compliance and/or tighter labour and environmental laws within the USCMA. And both candidates may contest the Mexican government’s preferential treatment of state-owned energy firms, which could fall foul of the USMCA’s market access and competition regulations.
  • Otherwise, Biden’s climate change agenda would put pressure on some Latin American economies. US-Brazil relations would sour over the deforestation of the Amazon – something Biden mentioned in his first presidential debate. That’s clearly not an issue for Trump, who has struck a close bond with Brazilian President Bolsonaro which recently led to a small trade pact between both sides.
  • What’s more, Biden’s focus on clean energy could put downward pressure on oil prices over the medium term, and would add to our view that global oil demand will peak around 2030. That would darken the prospects for oil producers in Latin America including Colombia, Ecuador, Venezuela and Mexico, which could lose market share to lower cost producers in the Middle East over the coming years.
  • Meanwhile, a post-election US fiscal stimulus may help Latin American economies, though it would not be transformative. In principle, Mexico would be a major beneficiary of another US fiscal splurge – almost 30% of its GDP are exports to the US, compared to less than 5% for other major Latin American economies. (See Chart 2.) However, even if there is a ‘Blue wave’ with the Democrats winning the White House and Congress, a US fiscal expansion would take time to implement and would probably be smaller than most expect. (See our US Economics Update.)
  • Accordingly, the direct spill-over effect would be modest in Mexico and negligible in the rest of Latin America. The upshot is that domestic factors will continue to dominate the economic outlook in the former, particularly the continued rapid spread of COVID-19 in Mexico and the government’s frugal fiscal stance. This feeds into our view that Mexico’s economy will underperform almost all others in Latin America over the coming quarters, regardless of the outcome of the US election. (See our Latin America Outlook.)
  • The election result is likely to impact Latin America financial markets over the coming days and weeks. The growing chance of a Democratic victory has supported risky assets and EM currencies in recent weeks, particularly the Mexican peso. (See Chart 3.) It may rally a bit further if this outcome materialises. On the flipside, in the very near-term, a Trump win would presumably cause the peso to give up its recent gains.
  • A contested election would put downward pressure on the Mexico peso too, as well as EM currencies and risky assets more generally, by raising uncertainty and reducing the chance of a US fiscal stimulus. (See our Global Markets Focus.) However, we think that the downside is limited for the Mexican peso – especially when compared to the 12% sell-off soon after the 2016 election. The trade risks are lower now and Mexico’s current account is in a much better shape.
  • Finally, severe sanctions against Venezuela look set to remain in place under both Trump and Biden. While Biden would take a more multilateral approach, there is a broad rejection of President’s Maduro’s legitimacy across the US political spectrum and its foreign allies, suggesting that sanctions will probably stay in place. That includes an embargo on Venezuela’s oil exports which have added to the demise of the sector. (See Chart 4.) Regime change appears to be the only way to overturn these sanctions, though the chance of this has faded in recent months. Indeed, the opposition in Venezuela has fallen by the wayside, and it is set to boycott December’s National Assembly election which could see its influence wane further.

Chart 1: Mexico Goods Trade Balance With US
(12m Sum, US$bn)

Chart 2: Goods Exports to US (% of GDP, 2019)

Chart 3: Change in EM Currency Vs. US Dollar
Since 1st October (%)

Chart 4: Venezuela Exports (US$bn)

Sources: Refinitiv, Capital Economics


Nikhil Sanghani, Latin America Economist, nikhil.sanghani@capitaleconomics.com