Donald Trump's victory in the U.S. presidential election does not have near-term implications for the U.S.'s AAA/stable sovereign rating, which still benefits from unique strengths, Fitch Ratings says.
The medium-term impact of president-elect Trump's economic and fiscal policies would be negative for U.S. sovereign creditworthiness if they were implemented in full. There are uncertainties about the detail of Trump's program, the degree to which he will seek to carry it out and his capacity to implement it.
The last will depend on the degree of cooperation between the president and the Republican majorities in the House of Representatives and the Senate, and how far Senate Democrats are able to filibuster proposed measures, Fitch said.
The election of a polarizing figure like Trump may put institutional relationships under strain, although his victory will give him significant political capital. Early indicators will be funding the government and raising or suspending the federal debt limit (which has been lifted until March 2017).
Trump's key economic policy proposals include tax cuts, renegotiation of trade agreements, less openness to immigration, business deregulation, and higher infrastructure spending. His flagship tax cut proposal is the area of greatest overlap with the "Better Way" agenda promoted by Republican House Speaker Paul Ryan, according to the rating agency.
The fiscal impact of the Trump plan would be negative for U.S. sovereign creditworthiness over the medium term, as tax cuts alone cannot generate enough growth to make up for the loss in revenue, Fitch said. Tax cuts would increase household disposable income, which could boost short-term growth when coupled with deregulation and higher public investment. But this would depend on how far such measures are offset by potential negative factors such as a hit to private investment from policy uncertainty, financial market developments (for example a rising dollar and falling equities), and adverse trade effects, according to the rating agency.
It is uncertain whether corporates would boost investment in response to a tax cut as investment growth has been slow despite strong profitability and a recent boom in corporate borrowing. A rise in disposable income would also likely spur inflation or external imbalances over the medium term, as the U.S. output gap between actual and potential economic output has virtually closed.
A major shift toward trade protectionism through the proposed policies of withdrawal from NAFTA and the imposition of tariffs on China would have significant adverse implications for U.S. investment and growth and push up prices, particularly in the event of foreign counter measures or "currency wars," Fitch said.
Such a shift would be vigorously resisted by corporate lobbies and would expose a gulf between the president and the mainstream of Republican legislators. In theory, the president can use executive powers to withdraw from trade agreements. In practice, Congress may demand a role in considering any change to trade treaties it has voted into law.
Government debt/GDP would rise dramatically were the tax cuts to be implemented in full. The net loss of revenue stemming from the planned cuts to individual and corporate income tax rates has been estimated by the Urban-Brookings Tax Policy Center at USD6.2trn (a third of 2016 GDP) over a 10-year horizon compared with the current baseline scenario published by the Congressional Budget Office, which already forecasts federal debt/GDP to rise by 9pp of GDP by 2025.
A rapid move into substantial fiscal deficit by the US could push up borrowing costs. The U.S.'s AAA/stable sovereign rating is underpinned by unparalleled financing flexibility and a large, rich and diverse economy, Fitch added. The risk of substantial fiscal deterioration, and of deteriorating coherence and credibility in economic policymaking, remain the key rating sensitivities.
