The Big Idea
Latin America | Implications of a potential Trump re-election
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As former President Donald Trump’s re-election prospects rise, the debt markets in Latin America have noticed. El Salvador bonds have bounced. Discussion has started about tangible benefits of stronger diplomatic relations for countries like Ecuador, El Salvador and Argentina. There are potential risks from more restrictive immigration policies, notably in Guatemala. It’s still early, with lots of uncertainty about policy. But there is a Trump track record available, and the Latin America markets are combing through it.
There are quite a few countries that would benefit from stronger US diplomatic relations, especially if that could translate into access to external credit or foreign direct investment. This would be particularly relevant for those rated ‘B’ or below with liquidity stress from low foreign direct investment and restricted external market access. There is also potential impact on relations with the International Monetary Fund if US support leads to broader IMF financing or eligibility flexibility. This could prove marginally beneficial for Argentina if it can access the $5 billion to $10 billion in additional loans, or it may be transformational for El Salvador if it leads to a more flexible IMF program. The stronger IMF relations would be quite impactful for El Salvador, especially for its small gross financing needs.
The US government has significant influence as the largest stakeholder in the IMF, but this doesn’t necessarily translate into actionable results. The US still only has minority voting rights. There is also a question of policy priorities and how dominant are diplomatic relations with Latin America against a crowded US domestic policy agenda. The personal relations between Trump and President Nayib Bukele of El Salvador are particularly strong, but time will tell if that is sufficient to upgrade the policy priority of a small Latin American country. The timeframe is also quite aggressive on either finalizing an IMF program or seeking two to three credit rating upgrades before October 2025. It’s difficult to assume a direct correlation between a Trump presidency and an IMF program for El Salvador or even an upgraded IMF program for Argentina.
This doesn’t rule out some benefits from a technical assistance program from the US Treasury or maybe even US International Development Finance Corp. financing for debt-for-nature swaps or broader access to funds from the World Bank. The US has more diplomatic influence over their dominant leadership in the World Bank relative to the European leadership of the IMF. Ecuador is unique in benefiting from strong US diplomatic relations across both the Trump and Biden administration. Their geopolitical relevance is now probably higher on the importance of the migration issues and national security issues.
The America First strategy could also renew the long-dormant strategy of trying to diminish China’s influence in the region with DFC loans to “refinance predatory Chinese debt” in exchange for private investment in strategic sectors. This America Crece program was suddenly suspended on the transition to the Biden administration with a de-emphasis on fossil fuels. This could provide some marginal cash flow relief for the remaining China loans in Ecuador as well as attract foreign direct investment in the oil sector. These initiatives could also maybe translate to Argentina for similar strategic sectors and legacy Chinese influence or additional foreign investment in infrastructure opportunities across Central America, including El Salvador and Panama.
It’s logical to assume some marginal US diplomatic benefits for the countries with the strongest ideological connection including El Salvador, Argentina and even Ecuador and more impactful benefit for those countries with smaller gross financing needs.
There is also some negative risks of a shift on immigration policies. Guatemala is on the front lines heavy dependence on workers remittances and a consistent wave of emigration necessary to relieve social pressures. Tighter US borders would then require more effective budget management on critical sectors like education and social spending. The 2025 budget debate is increasingly relevant to recognize higher revenues and a slightly looser budget.
There are only early strategy implications, with the optimism of US diplomatic relations coinciding with the risk-on appetite and favorable valuations after the June underperformance of the high yielders. El Salvador and Ecuador have been the outperformers this month with further gains still possible on a re-test of the former price highs. There are still probably follow-through gains under the risk-on appetite and the still attractive valuations. It doesn’t take much of an excuse at these levels with room to still retrace back to year-to-date tights under the “diplomatic optionality.” The prospects for stronger US bilateral support may prove only marginal against the size and extent of the economic stress in Argentina; however, it’s unusual that bond prices have ignored any positive diplomatic/policy optionality.
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