Event

In the USA, the campaign for the 2020 presidential elections kicked off last week. Trump is seeking re-election and has once again made migrant policy a top priority. Mexico was the first country to be hit with stronger anti-migrant rhetoric, when Trump threatened to levy a tariff of 5% on its exports as of 10 June, which would increase every month by 5% until 1 October, when it would reach a hefty 25%. These tariffs would have hit the Mexican economy severely, given that at present roughly 80% of Mexico’s exports go to the USA. On 7 June, Mexico averted the tariff by vowing to crack down on migrant flows. Two weeks later, countries in the Northern Triangle (El Salvador, Guatemala and Honduras) also came under fire by Trump’s anti-migrant rhetoric when they saw roughly USD 550 million in aid withdrawn. Migrant flows from Central America have indeed shot up in recent years, and Trump believes that the countries are not doing enough to stem the flow of illegal migrants. Furthermore, Trump announced that raids would be held in order to find and deport the estimated 11 million illegal immigrants in the USA, most of whom come from Central America, meaning that the region is likely to remain in the firing line in the coming months.

Impact

The exact impact of the aid cuts on the economies of the Northern Triangle is not yet clear. Nevertheless, it will certainly diminish the capacity of national governments to tackle societal problems, such as poverty and violence. Therefore, Trump’s policy decision could backfire; indeed, the large flow of immigrants from the Northern Triangle can be explained by security and development indicators. Firstly, according to the World Bank, Honduras and Guatemala have a high level of poverty with respectively 30% and 25% of the population living on USD 3.20 a day or less. El Salvador has a lower but still significant poverty rate (10%). Secondly, again according to the World Bank, El Salvador and Honduras have the highest number of homicides per 100,000 inhabitants worldwide, and Guatemala ranks 10th. The cut in aid could mean less funding to tackle these problems and as such, more people might opt to flee these countries.

The threatened mass deportation of illegal migrants will impact Mexico and the Northern Triangle the hardest. The former accounts for almost half of the illegal migrants in the USA, while the latter accounts for roughly a fifth. However, the impact of the mass deportation will vary between countries. Graph 1 shows the volume of illegal migrants from each Central American country in the USA vis-à-vis its national population. It is clear that although Mexico has the largest population of illegal migrants in the USA, compared to its national population the number is comparatively low. Honduras and Guatemala have similar levels to Mexico, whereas El Salvador has a much higher level of illegal migrants in the USA vis-à-vis its national population.

And it’s not only the sheer volume of possible returning migrants that is important; the impact also depends on a country’s ability to cope with a return of migrants. Economic growth and the rate of unemployment are economic indicators which can provide some insight, and economies with a high rate of unemployment and slow or negative real GDP growth might have difficulties providing jobs for deported migrants. Graph 2 shows the expected real GDP growth in 2019 and the rate of unemployment in 2018 for Mexico and the Northern Triangle. Here once again El Salvador has the worst hand, as it has a somewhat elevated unemployment rate and the economy is growing slowly. Mexico is doing better, but following the contraction of its economy in the first quarter of 2019, providing jobs for deported migrants might prove to be problematic. Honduras and Guatemala seem to have more room to cope with a return of illegal migrants from the USA. Furthermore, alongside these economic indicators, the security situation, the weakness of institutions and social indicators will also have a significant impact on the ability of countries to cope with mass deportation. As mentioned above, the Northern Triangle scores rather poorly on these indicators. Mexico also has a high number of homicides per 100,000 inhabitants (it ranks 13th worldwide), while poverty indicators are more in line with El Salvador (11% of the population lives on USD 3.20 a day or less).

Another key indicator of the possible impact of mass deportation is how much a country relies on remittances from the USA. Remittance income supports consumer spending and economic growth, and can also be an important source of export revenues and as such have an impact on the current account balance, external debt and foreign-exchange reserves. Graph 3 shows the importance of remittance revenues per country in 2018. Mexico relies fairly little on remittances, while the Northern Triangle depends quite heavily on them, and the economies of these countries would be heavily impacted through this channel if mass deportation took place.

Trump has left the door open for a deal if progress is made regarding a crackdown on migration. For example, Guatemala is negotiating with the USA to become a safe third country. As such, migrants who enter Guatemala first have to claim asylum there, blocking those migrants from lodging claims in the USA. However, a deal with the USA doesn’t mean that the Central American countries are off the hook. For example, in Mexico the tariff threats came just weeks after a trade deal with the USA was negotiated, and the negotiations for this new deal (USMCA) were also accompanied by tariffs (threats) – not to mention the fact that Mexico could again become a target: enforcement of the terms of the agreement will be evaluated every 45 days, and if Mexico's progress is deemed insufficient, President Trump could once again renew the tariff threats.

In the run-up to the US elections, anti-migrant policies are likely to remain in the headlines. This was already a campaign theme in 2016 which propelled Trump to victory. Hence, Mexico, Guatemala, El Salvador and Honduras might see more anti-migrant policies hitting their economies in the coming months, and in addition the Northern Triangle is quite vulnerable to these policies because of a reliance on remittances. Of these countries, El Salvador may be the most severely impacted as it has a rather high unemployment rate and slow economic growth. Mexico seems more robust, but as the USA is by far its biggest trading partner, tariffs on its exports could jeopardise the entire economy. Therefore, the short- and medium-/long-term political risk classifications of these countries are under high pressure.

Analyst: Jolyn Debuysscher – J.Debuysscher@credendo.com