Investing.com – The implementation of U.S. President Donald Trump’s border adjustment tax BATS poses risk to emerging markets as the dollar appreciates, Fitch Ratings warned in a report released Wednesday.
“The proposed introduction of a BAT to the U.S. corporate tax system could have sizeable adverse spill-overs to other countries,” the credit ratings agency said.
“It could raise the burden of U.S. dollar-denominated debt in EMs, precipitate strains on U.S. dollar-linked exchange rate regimes, worsen current account balances and GDP growth for major exporters to the U.S., reduce FDI inflows, and lead to a loss of tax revenues for countries that host U.S. multinationals,” Fitch enumerated in the report.
The agency indicated that it would expect a sharp appreciation in the greenback if the reform proposals were to become law, although it recognized that it was unclear whether these proposals will be approved, as they face opposition in the Senate, and the White House has so far been largely non-committal.
“An appreciation of the U.S. dollar would lead to a rise in debt/GDP ratios and debt service burdens of EMs with U.S. dollar-denominated debt on their balance sheets,” Fitch said.
According to the credit rating agency, Argentina, Turkey, Brazil and Indonesia have the highest sovereign and corporate sector US dollar-denominated debt (as a percent of GDP) among large EMs.
Fitch further indicated that countries with dollarized banking systems may see an increase in non-performing loans.
Fitch also warned that foreign exporters would lose cost competitiveness in the U.S. unless the dollar appreciated to fully offset the impact of the BATS on import costs.
“This would likely mean a fall in rest of the world (ROW) exports, slower GDP growth and some deterioration in current account balances,” these experts said.
“The US is the largest export market for 22 Fitch-rated sovereigns, with Mexico (81% of merchandise exports) and Canada (77%) the most exposed,” they added.