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Fitch warns Trump tax cuts a negative for US creditworthiness, borrowing costs

Donald Trump
Mandel Ngan | AFP | Getty Images
Donald Trump

As investors digest a surprise win by U.S. President-elect Donald Trump, credit rating agency Fitch cautioned in a note on Wednesday that Trump's economic and fiscal agenda could be a negative for the country's sovereign creditworthiness if his plan is fully enacted.

"Trump's key economic policy proposals include tax cuts, renegotiation of trade agreements, less openness to immigration, business deregulation, and higher infrastructure spending," Fitch wrote.

"The fiscal impact of the Trump plan would be negative for US sovereign creditworthiness over the medium term, as tax cuts alone cannot generate enough growth to make up for the loss in revenue," analysts added.

If Trump is able to push his tax cuts through in full, the ratio of government debt to gross domestic product would jump dramatically. Additionally, borrowing costs could rise if the U.S.' fiscal deficit increases rapidly.

Still, Fitch notes the degree to which Trump is able to carry out this agenda will hinge on how effective the Democrats in the Senate are able to filibuster his measures and to what degree the president-elect and the Republican majorities in the House and the Senate cooperate.

While tax cuts would boost disposable income and thus could increase growth in the short term, potential negative factors could offset some of this, such as adverse trade effects and uncertainty weighing on private investment or a drop in stocks.

Higher disposable income would likely lead to more inflation, while a shift toward protectionism, which Trump has advocated through his criticism of America's trade policies, "would have significant adverse implications for US investment and growth and push up prices, particularly in the event of foreign counter measures or 'currency wars.'"

Fitch does not think Trump's win has any near-term consequences for the country's triple-A rating, adding it is "underpinned by unparalleled financing flexibility and a large, rich and diverse economy."