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Fitch Sounds Alarm on Risk Trump Poses to Sovereign Debt

The ratings agency warns that diminished predicatability of U.S. policy threatens global economic growth.

Fitch Ratings has warned that the actions of President Donald Trump and his administration could be dangerous to the credit worthiness of other nations.

In a statement today, Fitch says major risks to sovereign credits include “the possibility of disruptive changes to trade relations, diminished international capital flows, limits on migration that affect remittances, and confrontational exchanges between policy makers that contribute to heightened or prolonged currency and other financial market volatility.” Sovereigns most at risk to changes in their credit fundamentals are countries with close economic and financial ties to the U.S., including Canada, China, Germany, Japan, and Mexico, which Trump’s administration has identified as having trade arrangements or exchange rate policies that warrant attention, Fitch says.

Three weeks into his tenure in the White House, President Trump has shown himself to be an unconventional and unpredictable world leader. From his controversial executive order seeking to block migration from seven predominantly Muslim countries and suspend the entry of refugees from Syria, to defending his actions via Twitter, Trump has drawn intense scrutiny even as some supporters applaud such boldness. The U.S. President also plans to build a wall along the Mexico border, a pledge that he repeatedly made on the campaign trail, and has been insisting that Mexico will pay for it.

“Tighter immigration controls and possible deportations could have meaningful effects on remittance flows, as the U.S. has the world’s largest immigrant population,” Fitch says, pointing to risks for Mexico, as well as Honduras, El Salvador, Guatemala, and Nicaragua. In November, Fitch revised its BBB+ outlook on Mexico’s sovereign credit to “negative,” partly due to Trump’s surprise victory over Hillary Clinton in the U.S. election.

Countries with direct U.S. investment are at risk of being “singled out for punitive trade measures,” according to Fitch’s statement today. Again, Mexico is at risk, along with Canada, the U.K., the Netherlands, Germany, China, and Brazil.

The Fitch report is not all doom and gloom. The credit rater says it’s favorably inclined toward elements of Trump’s economic agenda, specifically infrastructure spending, regulatory roll backs, and tax cuts. It may be that, after the current flurry of activity, the Trump administration may normalize and revert to a more business-as-usual, GOP-style White House favoring business and de-regulation. Still, James McCormack, Fitch’s London-based managing director for sovereigns, and Charles Seville, a New York–based senior director in the group, warn that “the present balance of risks points toward a less benign global outcome.”

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