Latin America (LatAm) and the Caribbean are the most susceptible regions to a US recession, Fitch Ratings says in a new report. This reflects LatAm and the Caribbean’s geographical proximity and various transmission channels, which tie them to US economic cycles and policy decisions.
Fitch cut its US 2023 growth forecast to 0.5% in its most recent Global Economic Outlook published September 2022; it forecasts a mild US recession beginning in 2Q23.
The main transmission channels into LatAm and the Caribbean are trade, remittances, tourism and commodity prices. Within these regions, the countries’ different economic characteristics mean the impact could vary considerably.
Lower US external demand primarily affects Mexico due to its export-dependence and geographical proximity (Mexico is among the US’s top three trading partners).
A large portion of Central American exports are demanded by the US, although these countries tend to have a more diverse export markets base.
South American economies have limited trade links with the US, but are indirectly affected via the impact on global trade and commodity prices.
Weakening US household incomes and employment could imperil migrants’ capacity to send remittances home, and discourage tourism.
Remittances account for more than 20% of GDP for some Central American countries. Caribbean and Central American economies are vulnerable to a sudden stop in tourist arrivals, particularly Aruba (the world’s most tourist-dependent country as a share of GDP).
A US recession, in tandem with Fed tightening, adds to challenges for frontier markets, as costlier external financing could complicate policy options, and for the region’s more developed economies if their current account deficits are large.
We expect limited pressure on LatAm and Caribbean’s sovereign ratings from a mild US recession. Any ratings impact will ultimately depend on the magnitude of the US economic shock and each country’s capacity to absorb it.
‘Latin America and the Caribbean’s Vulnerabilities to a US Recession’ is available at www.fitchratings.com or by clicking on the link above.