Indonesia’s Economic Outlook Amid US Interest Rate Shifts

As Indonesia stands at the crossroads of economic dynamism and global financial interplay, the imminent shifts in US interest rates cast a substantial shadow of anticipation. The intricate interplay between Indonesia’s economic landscape and the fluctuations in US interest rates has become a topic of keen interest and intense scrutiny. 

This article will delve into Indonesia’s economic outlook within the context of these impending US interest rate changes. By exploring the potential ramifications, challenges, and opportunities that lie ahead, we aim to shed light on the path that Indonesia’s economy may traverse in the wake of these significant global financial shifts.

US interest rates hiked the highest in 22 years

In July 2023, the US Federal Reserve (The Fed) implemented another increment of 25 basis points, elevating its benchmark interest rates to a range spanning from 5.25% to 5.55%.

According to Forbes’s report, this move by the Fed brings the interest rates to their highest since February 2001, marking the highest level in the last 22 years. The decision to implement this policy is driven by the ongoing need for the US to combat inflation.

However, in June, annual US inflation increased at its slowest pace in over two years, accompanied by diminishing underlying price pressures. This trend could bring the Federal Reserve closer to concluding its most rapid interest rate hiking cycle since the 1980s.

How do the US interest rates impact the global economy?

The US wields significant influence over global financial markets. The Fed’s decision to change interest rates could have economic consequences beyond its borders. 

According to the World Bank, the rapid implementation of tighter monetary policy in the US will have a pronounced effect on emerging markets and developing economies, commonly referred to as EMDEs. 

The concern over EMDEs

EMDEs with financial vulnerabilities and macroeconomic imbalances may be particularly exposed to the economic and financial challenges of US interest rate hikes. Moreover, following a series of bank failures this spring, turbulence in the US financial system could also threaten EMDEs.

The strain on the US banking sector, which has led to a slower-than-expected path of interest rate adjustments, could result in reduced exports and disruptions in financial markets, impacting their growth prospects.

Since late 2021, many EMDEs have experienced difficulties accessing the market and face an increased risk of default. With the potential economic risk, the question remains on how the hike of US interest rate can affect Indonesia.

US interest rates’ effect on Indonesia

The Fed’s increase in the US interest rate could influence Indonesia’s central bank (Bank Indonesia) to raise its benchmark interest rate. However, if the rupiah remains stable, Bank Indonesia will likely maintain its current interest rate.

Furthermore, the Fed’s interest rate increase can impact investments in Indonesia, as reflected in the value of the Indonesian rupiah. Foreign investors will hold US dollars as their main currency, leading to an appreciation of the dollar and a decline in the rupiah’s value. 

Yet, the impact of the US interest rate hike on the Indonesian bond and stock markets is relatively insignificant for the time being. This anticipation stems from the fact that the Indonesian market has already factored in two rate hikes by the Federal Reserve in the second half of 2023. 

The subsequent increment, predicted for September, is projected to be a 25 basis points elevation. This aligns with Bank Indonesia’s prediction of a US interest rate hike in September. 

This prediction finds support in the most recent United States Gross Domestic Product (GDP) data, revealing a growth of 2.4% in the second quarter of 2023. This figure surpasses the previous quarter’s 2% and the anticipated 1.8%.

While the US interest rate can affect Indonesia’s macro economy, businesses should also examine how the interest rate increase affects business operations.

Read more: Can Indonesia Overcome Stagnant Foreign Direct Investment?

Business risks from interest rates hike

The increase in interest rate can present businesses with advantages and disadvantages, as described below comparison:  

Disadvantages for business

The rise in interest rates can bring about a range of drawbacks for businesses, including:

1. Difficulty in servicing debt

When interest rates rise, a company may experience a reduced capacity to service its debt, as it incurs higher costs without a corresponding revenue increase to balance them.

2. Stagnant growth

When interest rates increase, businesses frequently experience slower growth rates due to challenges in accessing loans and the elevated costs associated with borrowing.

Read more: Addressing Business Challenges in the Indonesian Market

Advantages for business

While the hike of interest rate, in general, can affect the overall cost of doing business, some types of business may reap advantages instead, with the following circumstances:

1. Business-owning floats

As interest rates rise, banks and institutions also witness a rise in interest income. Consequently, having a giant float can result in higher returns when interest rates increase.   

2. Those with negative working capital

Businesses with negative working capital usually gain from rising interest rates because the excess cash on their balance sheet starts earning a return. This gives these businesses more resources for internal investments and other operational goals.

3. Company with good cash flow

Companies experiencing positive cash flow have the potential to gain from increasing interest rates as they can use their surplus funds to invest in higher-yielding securities.

Effective business strategy during rising interest rate

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Amid the increasing trend of interest rates, companies should consider the right strategy to ensure business stability and stay ahead of the curve.

1. Evaluate current loan rates

Variable-rate loans can quickly adjust in response to market rate increases, posing a risk to the available cash flow. It is prudent to take action to avoid potential costs that could impact a company’s financial stability.

2. Refinancing debt

To enhance the business’s financial standing, consider refinancing or consolidating high-interest debts, including loans expected to face rate hikes.

3. Finance before a higher rate increase

If your business aims to find new financing, it might be best to act promptly before the rates continue to rise.

4. Reduce expenses

To mitigate the financial impact of the rate hike on your business, contemplate implementing cost-cutting measures. Explore opportunities to reduce expenses related to supplies and production, thus maintaining a better financial balance.

Conclusion

To conclude, the ripple effects of the US interest rate hike extend across the global economy, impacting nations like Indonesia. Within this complex scenario, businesses face a dual prospect of challenges and opportunities. 

Amidst the backdrop of economic unpredictability, prioritizing the stability of your business takes center stage. InCorp Indonesia emerges as a valuable ally, offering a reliable resource to turn to by providing an extensive range of financial & operational resilience services alongside specialized accounting solutions. 

By engaging with InCorp Indonesia’s expertise, you can fortify your business in advance against the unpredictable tides of the economy, safeguarding its operational continuity and financial prosperity. Don’t hesitate to contact our consultants by filling out the form below.