Surging currency rates and purchasing power: How the US Fed’s moves impact Southeast Asia’s largest economies

JAKARTA/BANGKOK: Business has been tough over the past few years for Mr Budiarto Tjandra, a manufacturer and exporter of Adidas shoes since 1988.

Global demand for purchasing his products has taken a hit in the wake of the COVID-19 pandemic and prolonged conflicts in Ukraine and Gaza. 

As a result, his company, PT Panarub Industry, located in Tangerang on the outskirts of Jakarta, has recently had to let employees go.

He thinks that brighter days might be ahead though and has his hopes pinned on a key economic decision made on the opposite side of the world.

The United States Federal Reserve’s (Fed) decision to cut interest rates by 50 basis points - or half a per cent - on Sep 18 was evidence of the world’s biggest economy easing off from a prolonged and aggressive bid to control inflation.

Rates dropped to a target range of 4.75 per cent to 5 per cent, the first reduction in four years. 

The waves made by the decision were quick to land in Southeast Asia. And businesses and consumers alike are preparing for the potential effects. 

“With the decrease of the Fed rate, there will be a global impact,” said Mr Budiarto.

“With the interest rate decreasing, the economy can move better, so our global market will grow, and we will see an increase in demand. That is my hope.” 

The Fed’s decision has generated both headwinds and tailwinds for Southeast Asia’s two biggest economies - Indonesia and Thailand - leaving their respective central banks to delicately manoeuvre in the aftermath.

Historically, official interest rates in both countries have tracked the Fed’s closely, due to economic interdependence, concerns about currency fluctuations and flows of global money.

When the Fed moves, typically large sums of money are shifted by investors from US government bonds to developing markets, such as those in Southeast Asia, causing their respective currencies to strengthen in response.

That has happened in recent weeks, with both the Thai baht and Indonesian rupiah strengthening significantly against the greenback. The impacts can cascade through the economy, impacting industries from manufacturing to tourism.

Differing policy responses this time around highlighted the delicate domestic considerations both countries face.  

Indonesia made a proactive move; just a few hours before the Fed cut its interest rate, the Indonesian central bank, Bank Indonesia (BI), also delivered a rate cut, its first in over three years.

The Bank of Thailand (BoT), meanwhile, has remained cautious and may sit idle into 2025 - despite domestic political pressures to make a cut - due to its own sluggish economy, a cost of living crisis and soaring consumer debt.

“A reduction in interest rates could help to alleviate some of these pressures by making borrowing cheaper and potentially boosting consumer spending,” said Ms Wilasinee Siriboonpipattana, a consultant at Mintel Consulting.

“However, given the current economic climate, with high household debt and inflation concerns, any potential rate cuts would need to be carefully managed to avoid exacerbating existing financial vulnerabilities,” she added.

WHY BI MONITORS THE FED

Indonesia’s rate was cut by 25 basis points to 6 per cent, the first reduction since Feb 2021.

The central bank had anticipated the Fed’s move, so it adjusted its own policies hours before, explained Mr David Sumual, chief economist of Bank Central Asia (BCA), Indonesia’s largest private bank.

While that decision was unexpected, experts and business people welcomed it, acknowledging that what happens globally, especially in the US, will ultimately directly affect Indonesia’s economy, which has a growth rate currently of about 5 per cent.

“The impact could be positive. The US interest rate cut will be followed by other global central banks to encourage global economic recovery, which will ultimately positively impact Indonesia's trade and investment outlook,” said Madam Dian Ayu Yustina, an economist from Bank Mandiri.

BI’s moves have resembled the Fed’s, not just in recent months, but over several years.

When the Fed cut its interest rate three times in 2019, BI also did so, making four adjustments that year. When the Fed started to increase its rate in 2022, BI followed suit.

Mr David noted that the strength of the rupiah - which had surged on expectations of a rate cut in the US - had helped make BI’s own move possible.

THAILAND FACING ECONOMIC DILEMMAS

Over in Thailand’s capital Bangkok, every weekday morning, Ms Chonnikarn Chintanaroj is greeted by messages in her family’s WhatsApp group chat.

Without fail, it is her father, keeping everyone abreast of the fluctuations of the Thai baht, global oil prices and other key economic data.

The Fed’s recent actions have meant this information has become even more critical to business.

“It’s like, happy Monday! And then all the information, all the analysis of the trends for the day and for the rest of the week,” she said.

Ms Chonnikarn is the marketing director of her family’s long-running export business. With customers all over the world, they provide Thai products such as soy sauce, rice and noodles to be used in restaurants or sold in markets overseas.

With all of their transactions done in US dollars, the strength of the Thai baht in recent weeks - which reached its highest mark versus the US dollar since early 2022 - has dented the profitability of the business.

The support level of 32.20 baht per dollar was broken through last month, reaching 32.15 on Sep 30. This is a price point where a currency tends to stop falling and may begin to rise again.

“The Thai baht, it’s been getting stronger. To put it the easiest way, basically, we get less money,” she said.

If exporters lift their prices in response to the currency fluctuations, it can make their products less competitive compared to regional rivals, a dilemma also filtering through other parts of the Thai economy at present.

In reaction to the Fed, Commerce Minister Pichai Naripthaphan urged the BoT to consider a cut to rates, which are already among the lowest in the region at 2.5 per cent, to stimulate investments and ease pressures on regular Thais being buried by record levels of debt.

“Every time the US raises or cuts interest rates, it affects the flow of capital in and out of Thai markets. When the US’s policy rate goes down it would also cause the baht to strengthen, and vice versa,” he told local media last month.

Thailand’s recent currency scenario is not isolated - the Indonesian rupiah, Malaysian ringgit, Singapore dollar and Chinese yuan have all also strengthened in recent weeks, a small potential silver lining for Bangkok. 

“Thailand’s export competitiveness is less affected, as a result of the collective strength of Asian currencies", said Ms Erica Tay, an economist at Maybank Investment Banking Group, based in Singapore.

However, the kingdom is currently grappling with significant household debt, which stands at about 90 per cent of the country's GDP - a 15-year high.

“This high level of debt is a significant impediment to economic growth, affecting consumers across different age groups,” said Ms Wilasinee.

It means people of all ages across Thai society are cutting back on discretionary buying and delaying major purchases, while credit card debt is a “key financial hurdle” for 23 per cent of Thais, according to Mintel analysis.

Waning consumer confidence in Thailand has been fuelled by the increased costs of regular household goods like food and drink, electricity and petrol.

Inflation has been lower than expected, however, at 0.35 per cent in August, below the BoT’s target range of 1 per cent to 3 per cent, a symptom of insufficient consumption or production.

Ms Tay said she expects the Bank of Thailand to make a 25 basis point cut only in the first half of 2025, meaning rates would stay in place for the remainder of this year.

There is speculation that a move could come earlier than that when the BoT meets next on Oct 16. The government has been keen for a drop to help ease some of the debt pressures on consumers and assist the financing of its digital wallet scheme, where it intends to give 10,000 baht cash handouts to millions of eligible residents.

But Ms Tay expects the central bank to remain cautious. “Over-borrowing by households, especially for non-investment purposes, has led to high levels of debt.

“Lowering interest rates might spur more borrowing and exacerbate the problem,” she said.

BORROWERS WAITING FOR A DROP

A rate cut delay would mean no imminent relief for mortgage holders and prolonged pain in an already struggling housing market - in both countries.

In Thailand, Kasikorn Research Centre forecasts 23-year-low growth in commercial bank mortgages this year, expected at just 1.2 per cent due to the diminished purchasing power of Thais.

Managing debt carefully is a major focus for Bangkok-based sisters, Ms Mallika and Ms Chutima Areamnat. Both professionals, they decided to purchase a condominium together several years ago and have already paid off their combined mortgage.

Ms Chutima has since taken out another loan for a new property with her husband. For Ms Mallika, who is on a single income, making a further investment in this economic situation would be a daunting task.

"It's kind of a scary idea with an economy like this, even though I have a good, stable job. I don’t feel secure," she said.

“Right now, I have two jobs. I would have to manage money better. I would have to find probably a third or fourth job to keep the money flowing into my account.  I'm pretty sure I could afford to pay for it but I don't like the insecurity of it.”

In Indonesia, Mr Budiarto from PT Panarub Industry told CNA he believes his loan payments will decrease, if and when commercial banks reciprocate a rate reduction.

He anticipates having more disposable income as a result of having to spend less on repayments, a purchasing power boost trend that is expected economy-wide.

“The interest rate cut will increase economic activity, business expansions and public consumption, especially those related to durable goods,” said Mdm Dian from Bank Mandiri.

Comfort could be on the way for Indonesia’s flagging housing market too, impacting a large number of people with loans.

Some 74 per cent of property buyers in Indonesia make purchases through mortgages, according to Mr Bambang Ekajaya, deputy head of the Indonesian Real Estate Association (REI).

Of the rest, around 15 per cent pay in cash instalments and around 10 per cent make full payments. 

“The economic conditions in Indonesia, post-COVID, have caused the middle class to decline by almost 9.5 million people, making the property market struggle more,” said Mr Bambang who also owns real estate company PT Cipta Graha.

He said real estate developers had to be innovative in creating attractive projects at affordable prices.

REI has almost 7,000 members across Indonesia, and the industry is often touted as one of the economy's main drivers, affecting more than 100 other sectors.

Lower interest rates could also bolster the country’s automotive industry, according to Mr Anton Jimmy Suwandy, marketing director of Toyota Astra Motor.

“I hope the positive impact can really be felt. Because lower interest rates can stimulate purchases, primarily through credit schemes with more competitive interest rates,” he said. 

Mr David from BCA pointed out that, in addition to the rupiah gaining strength, the Fed’s rate cut means imported items in Indonesia will be available at a lower price.

“Because the rupiah is stronger, importing raw material and products, such as electronics, vehicles, and spare parts, will be cheaper,” said Mr David.

IMPACT WILL TAKE SOME TIME

For those in both countries, having the Fed as an economic steer is not enough to allay a sense of uncertainty about the future. 

Both Ms Mallika and Ms Chutima said they have observed a rising reluctance among the younger generation to take on lifelong debt in the form of a mortgage. Ms Chutima said she understands why.

“The pain point for us is that we need to be careful about our work and about our income. If something is unstable, what will happen to us as a family? I feel like we’re already stuck,” she said.

In Indonesia, Mr Budiarto, the shoe producer, is realistic.

“The impact of the Fed rate cannot be felt directly for now. Even though Bank Indonesia has also cut its interest rate, our loans to the bank do not automatically decrease.

“It will take some time, but we hope that the interest rates of our loans will decrease even though not immediately.”

Mr Bambang from REI is also well aware of this. 

“But at least a reduction provides a breath of fresh air in the property business, which is currently in a slump, especially for non-subsidised commercial property,” he said.

It will take some time for the rate cuts to be reflected, analysts cautioned. Mr David said the effect on imported goods would take about six months. 

Since credit interest rates are varied, and often have set terms and durations, adjusting or cutting them will not happen quickly. Deposit interest rates tend to go down immediately, however, adversely affecting those with savings deposits.

“It will take time for the interest rate to be reduced, at least two to three months before the mortgage interest rate reduction can occur,” he said.

Meanwhile, the Fed could make a further cut before the end of the year, ensuring that central banks will need to remain nimble. 

According to Bloomberg analysis, 29 per cent of traders anticipate another half-percentage-point cut at the Fed’s next meeting in early November.

American credit rating agency Fitch Ratings expects the Fed to make four cuts through 2025, which may help bonds flow to Indonesia and Thailand. Mr David from BCA believes that, should it do so, "BI and BoT will also follow suit".

“If the interest rate cut is gradual, it will benefit emerging market portfolio assets.

“But if it is drastic and fast, it may not be good because it means the US is in a crisis or a recession,” he said.