Clearly, it’s not just the rupiah or Indonesian stocks and bonds that are under heavy pressure. These are some of the broader trends we see across emerging Asia. In fact, other emerging Asian currencies appear to have performed worse than the rupiah (so far this year) as investors are lured by rising US yields. Even gold cannot shake off aggressive Fed tightening in an uncertain global environment (at time of writing, gold price is at its lowest level in about two years).
On the one hand, with the Federal Reserve (Fed) far from completing the tightening of monetary policy to combat high inflation in the US, the burden on all emerging Asian assets is more than ever. The hawkish US Federal Reserve (Fed). But going forward, it may not just be about rising interest rates. Based on the Federal Reserve’s statement, the Fed appears willing to ignite a full-blown US recession to keep US inflation down.
Meanwhile, the European Union (EU) sees much the same picture as European Central Bank (ECB) officials say aggressive monetary tightening will continue the fight against record inflation across the bloc. . EU. So the Fed and ECB see recession as the solution to the inflation problem, or at least seem willing to risk recession through aggressive monetary tightening.
A looming global recession and a strong US dollar should affect Indonesia. A strong US dollar will cause import inflation into Indonesia (which is already struggling to contain inflation after the central government decided to raise the price of subsidized fuel in early September 2022). Accelerating inflation in Indonesia limits the purchasing power of Indonesian consumers, resulting in weaker consumption, which slows the pace of economic growth in the country (domestic consumption accounts for about 53% to 53% of the country’s total economic growth). 55%). Additionally, a strong US dollar is also bad for those holding (unhedged) US dollar-denominated debt.
We can also expect Indonesia’s trade balance to weaken amid the global economic turmoil at some point, as the looming global recession weakens demand for commodities. For example, the Chinese renminbi is currently trading near record lows against the US dollar, a situation that (if the yuan continues to depreciate) could weigh on demand from Chinese importers. Encourages bearish sentiment on the commodity. Since recovering from the COVID-19 crisis, Indonesia has been collecting windfall income through commodities, especially from coal and refined palm oil exports. In fact, the Indonesian government has recorded a (very rare) budget surplus so far in her 2022. Meanwhile, declining exports are a reminder that Indonesia needs to reduce its dependence on (mostly unprocessed) commodities.
[…]
Part of the introduction. The full text is available in the September 2022 report (electronic report, PDF in English). This report can be ordered by emailing info@indonesia-investments.com or by messaging +62.882.9875.1125 (including WhatsApp).
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