As the US presidential election draws near, Latin American economies, especially those heavily dependent on remittances, brace for potential impacts. Remittances – the money sent by migrant workers to support their families back home – play an essential role in boosting household income and stabilising economies across the region. Central American countries like El Salvador, Honduras, and Guatemala are particularly vulnerable to US immigration policy shifts, as remittances represent a substantial portion of their GDP, a recent report by Fitch Ratings has found. Mexico, with these inflows making up nearly 3.5% of its GDP, also closely follows developments in Washington.

Diverging immigration policies: Republican vs. Democratic approaches

The Republican and Democratic parties have notoriously taken vastly different stances on immigration policy, each of which could significantly influence remittance flows. Former President Donald Trump’s potential return to office would likely bring stricter immigration measures, including aggressive deportation policies and reduced asylum opportunities, which would cut back the number of migrants able to work in the US. Conversely, a Democratic victory, with Vice President Kamala Harris at the forefront, promises more continuity in immigration policy, aimed at hardening – but not drastically restricting – border procedures. Such stability may prove vital for sustaining remittance flows to Central American economies reliant on these funds.

The Economic Lifeline of Remittances

Remittances have long served as a lifeline for Latin American economies, primarily used for essential consumption such as food and housing. Central American nations stand out, with remittances accounting for more than 25% of GDP in countries like Honduras, El Salvador, and Nicaragua. These funds have grown in importance as they surpass other sources of revenue, such as foreign investments and exports, in many cases. A recent surge in migration has contributed to this growth, with countries receiving a combined $42bn in 2023 from family remittances alone, helping to sustain daily consumption in areas with few other economic opportunities.

Resilience amid economic shocks

Remittances to Latin America have demonstrated resilience, even amid economic challenges like the COVID-19 pandemic. While many feared a downturn, the initial slump was short-lived, with funds quickly rebounding and even hitting record highs. Chile, for example, saw a 42% increase in remittance outflows in the first half of 2024, part of a broader trend that reflects continued reliance on these funds for daily needs, savings, and education. However, signs of a slowdown have emerged; in Mexico, remittance growth decelerated in early 2024, raising concerns about future stability.

Labour market ties and economic vulnerabilities

The strength of the US labour market is a critical factor in remittance flows, as a rise in American household income generally leads to higher remittances. In turn, remittance flows can provide a crucial economic buffer for recipient nations, which often struggle with high poverty rates and trade imbalances. Yet, the impact of fluctuating US immigration policies remains a looming uncertainty for these economies. With Mexico’s peso hitting record lows and other Latin American currencies showing vulnerability, the outcome of next week's knife-edge election will likely play a pivotal role in shaping the economic landscape across the region.