Indonesia's Economic Outlook Under U.S. Policies

JAKARTA (Reuters) – Indonesia's growth and portfolio investment may face challenges if U.S. President-elect Donald Trump's policies disrupt global trade and hinder interest rate reductions, bankers during a parliamentary hearing indicated on Wednesday.

A U.S.-China trade war could potentially reduce Indonesia's economic growth by around 0.2 percentage points next year, with further declines possible if other nations respond similarly. Sunarso, President Director of Bank Rakyat Indonesia (BRI), highlighted this concern.

He emphasized the importance of vigilance, stating, "If the U.S. becomes protective and China reacts as it did in previous trade conflicts, the consequences for us could be quite severe." Both the U.S. and China are significant trading partners for Indonesia.

BRI, the nation's second-largest bank by assets, initially projected economic growth between 4.9%-5.2% for the coming year, but this estimate could drop to 4.6%-4.9% in the face of broader trade hostilities.

Darmawan Junaidi, CEO of Bank Mandiri, expressed that a trade war might also influence global commodity prices, given that China’s demand has a substantial impact on Indonesia's exports, including palm oil, coal, nickel, tin, and rubber.

Trump’s proposed tariffs—10% on all U.S. imports and 60% on Chinese goods—alongside expansive fiscal policies, have raised concerns among analysts about inflation and future interest rate cuts. Bank Negara Indonesia noted that these policies may lead to less anticipated rate cuts by the Federal Reserve. Royke Tumilaar, President Director, commented on the uncertain landscape ahead, suggesting that reduced taxes and tariffs could push inflation higher, complicating Fed rate reductions. This liquidity constraint could significantly impact expansion plans, he added.

Typically, Indonesia attracts capital inflows when the Federal Reserve eases monetary policies, as investors seek better returns. However, periods of uncertainty usually trigger outflows from emerging markets like Indonesia, as risk-averse investors withdraw.

Bank Indonesia (BI) had cut interest rates in September, preceding the Fed’s rate-cutting strategy. Recently, the Fed implemented its second rate cut, which BI indicated could influence its capacity to adjust Indonesian rates.

Indonesian President Prabowo Subianto is currently in the U.S., having met with President Joe Biden and communicated with Trump.

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