Moodys >> Trump election victory to alter landscape in trade, healthcare, financial regulation

Donald Trump’s victory in the 2016 US presidential election is likely to bring a set of policie that diverge sharply from those of the Obama administration. From the perspective of the US sovereign, the principal challenges are longer-term, relating to the rising fiscal cost of entitlements. More immediately, based on his campaign policy positions,1  a Trump presidency is likely to alter operating conditions for many sectors.

Five policy areas where potential changes stand to have meaningful effects on the credit quality of rated debt issuers are international trade, financial regulation, healthcare, immigration and corporate taxes. International Trade. During the campaign, Trump stated an intention to renegotiate trade relationships with China, Canada and Mexico, the US’s largest trade partners, and to impose severe tariffs on imports from certain countries to extract concessions on existing trade agreements. Policies that result in disruptions to US trade would be credit negative for sectors including autos, oil and technology, and credit positive for industries facing severe import competition, including steel and some manufacturing subsectors.

Financial Regulation.

Trump proposed eliminating the Dodd-Frank Act and advocated for a temporary suspension of all new regulation. Reducing regulatory compliance costs would support US banks’ profitability, but threatens to chip away at the credit benefits of the act: the strengthening of banks' balance sheets and reduced risk taking. 

Healthcare. Trump has advocated repeal of the Affordable Care Act (ACA). This would create confusion and problems if not accompanied by a clear path to a new plan. In the long run, however, the ability to price, design and underwrite policies profitably would be credit positive for US health insurers. At the same time, any resulting increase in the number of uninsured Americans would be credit negative for healthcare service providers and medical device suppliers. It would also hurt pharmaceutical companies by reducing

demand, although they would gain relief from fee, rebate and discount requirements.

For US states, ACA repeal would not necessarily reverse increases in Medicaid enrollment nor the associated costs, and Trump’s plan to convert Medicaid into a block grant would

force states to curtail services or pick up more of the costs themselves, a credit negative. 

» Immigration. Trump wants to increase employment among US citizens by reducing incentives to hire H-1B visa workers. His proposals would reduce the applicant pool for companies in sectors including technology, automotive and aerospace and raise employment costs. US universities would see declines in foreign student enrollment and

revenues if a reduced H-1B program discouraged applicants.

MOODY'S INVESTORS SERVICE CROSS-SECTOR

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history. 2 9 November 2016 Cross-Sector – US: Trump’s Election Victory to Shift Ground on Trade, Financial Regulation, Healthcare

Corporate Taxes. Trump has proposed lowering tax rates for all corporations, which he said would neutralize the benefits of holding cash overseas. Broadly speaking, lower corporate taxes are credit positive because of the net effect of higher cash flows. However, taxes are complex and specific to company circumstances, and the impact depends on a range of factors including cost of capital, capital structure and investments.

Congress composition is key to the implementation of Trump’s policies

While in this report we assess the credit implications of Trump’s policies taken at face value, the composition – by party – of Congress will be an important consideration in assessing whether and in what form these policies are ultimately implemented. Republicans continue to hold a majority of votes in both the Senate and the House, albeit with smaller margins.

Exhibit 1

New Composition of the Senate

Exhibit 2

New Composition of the House of Representatives

Note: 30 Republican and 34 Democratic senators were not up for election. Independent

senators currently caucus with the Democrats. Outcome for the 'undecided' were not yet

called at the time of publication.

Source: Congress, Politico

Note: Outcome for the 'undecided' were not yet called at the time of publication.

Source: Congress, Politico

MOODY'S INVESTORS SERVICE CROSS-SECTOR

3 9 November 2016 Cross-Sector – US: Trump’s Election Victory to Shift Ground on Trade, Financial Regulation, Healthcare

International Trade

Sources: Trump campaign website

Trump likely to take a tougher stance on trade 

During the campaign, Trump made many public statements regarding the effects of international trade on US employment, wages and the manufacturing sector more generally. He expressed strong skepticism about current trade agreements, particularly those with China, the North American Free Trade Agreement (NAFTA) and the proposed Trans-Pacific Partnership (TPP).

Trump said he would take a tougher stance against China's reported breaking of various trade agreements and World Trade Organization rules. He also stated an intention to tear up trade agreements (e.g. renegotiate NAFTA and withdraw from the TPP in its current form) and impose severe tariffs on imports from various countries, as necessary, to extract concessions from treaty partners.3 A meaningful and protracted disruption to the flow of goods and services