US protectionism poses risks to Central America, says Fitch

The prospect for an upturn in the US economy looks to benefit Central America and the Dominican Republic, but these countries are also faced with risks related to protectionist and anti-immigration policies, according to a special report from Fitch Ratings.

In a note to investors detailing the report, the ratings agency said the nations could "confront headwinds should US protectionism gain traction in the years ahead."

Under the administration of US President Donald Trump, there has been a marked surge in immigration raids. Meanwhile, the US legislature is currently considering proposals for building a vast border wall, taxing remittances and changing tax policy to create a border adjustment tax.

"The tightening of US immigration policy poses downside risks to remittances growth and could create additional fiscal pressures, as well as leading to dislocations in local labor markets," Fitch said.

The economies of El Salvador, Guatemala, Nicaragua and the Dominican Republic, all heavily dependent on US remittances, are particularly exposed to any proposal that would somehow tax or exact fees on money transfers going to the region.

"Foreign trade and remittances make up large shares of gross domestic product (GDP) in the sub-region, and foreign direct investment accounts for much of domestic investment."

Fitch added that Costa Rica and Panama are less directly exposed to shifts in US policy "owing to more diversified and greater concentration in high value-added manufacturing and services." Nevertheless, the countries are still highly interwoven with international supply changes and thus vulnerable to major interruptions abroad.

The agency sees a "low likelihood" for the renegotiation of the regional CAFTA-DR free trade agreement, given that "every member except for Nicaragua runs trade deficits with the US, and their economies are either dollarized or their currencies are slightly overvalued in real effective terms."

Nevertheless, the agency sees major changes to US trade policy having a potential effect on Central America and the Dominican Republic.

"The sub-region could still suffer collateral damage from a rise in global or regional protectionism and the adverse knock-on effects thereof," reads the note.

Fitch stressed that beyond external risks, the countries' greatest constraints on higher credit ratings rest in domestic and structural weaknesses. It also pointed out that governments in Central America and the Dominican Republic lack the fiscal space to increase social and security, while facing some of the highest crime rates in the world.