The Fed’s interest rate cuts could prove to be a boon for Southeast Asian economies

The decision of the US Federal Reserve to cut interest rates in September, with further reductions, could be a boon for developing economies in Southeast Asia.

“We are very confident and optimistic that with the rate cut … this market will return to a real GDP growth trajectory of 6-7% in the near term,” Saurabh Agarwal, head of Southeast Asia private equity at Warburg Pincus, told CNBC’s “Squawk Box Asia” last month.

That belief resonates with economists and finance officials across the region.

David Sumual, the chief economist of the Central Asian Bank, said that Indonesia is one of the countries that can take advantage of the Fed’s short-term and long-term policies.

“Further Fed cuts will benefit Indonesia mainly through the commodity channel, due to the potential rally in commodity prices, especially with China’s upcoming fiscal stimulus news. More limited due to new demand in the Chinese stock market,” he told CNBC.

Higher rates in the US are usually a negative for emerging markets as US investors usually send money home in search of decent yields. A key concern is also the interest rate differential putting pressure on the currency, and it could be a tough time for emerging market central banks trying to keep inflation at bay.

But on the flipside, when the US rates are easy, it can boost emerging markets that see new flows into the economy. Global commodities (the cornerstone of many emerging markets) also tend to rise in price as US dollars drops in a more dovish outlook by the Federal Reserve.

In this current environment, central banks in Indonesia and Thailand are trying to maneuver themselves after the recent Fed cuts.

Indeed, hours before the Fed cut its benchmark interest rate, Bank Indonesia – the country’s central bank – announced its first interest rate cut in three years in what appeared to be a surprise move.

Speaking ahead of the Fed’s interest rate cut, Henry Wibowo, head of Indonesia research and strategy at JPMorgan, told CNBC’s “Squawk Box Asia” that “Indonesia, in Asia, will be one of the main recipients of this portfolio flow” wherever it comes from. cut the US.

“If you look at the Jakarta composite index, one of the biggest sector drivers is the banking sector and we think that the banks will get the flow of portfolios coming and that should, basically, help to boost their multiples,” he said. Trading multiples are used by financial professionals to measure the value of stocks.

Indonesia’s interest rate hikes have historically followed the Fed, due to global cash flows and related currency fluctuations.

“Bank Indonesia tends to follow the Fed in cutting interest rates, although Bank Indonesia (BI) may reduce the BI rate at the September 24 meeting before the (US) Federal Open Market Committee meeting, due to the strong appreciation in the value of the Indonesian rupiah,” he told CNBC.

Sumual added that BI “can wait for more cuts by the Fed before continuing its interest rate reduction campaign, as the central bank continues to seek a balance between pro-stability monetary policy and pro-growth macroprudential policy.”

both sides Indonesian Rupiah and Thai baht currency is strengthened against US dollars Following the Fed’s decision, thanks in part to investors shifting a large amount of money from US government bonds to emerging markets in Southeast Asia.

And not only in two countries. both sides Malaysian ringgit and the Singapore dollar also strengthened behind the Fed’s cuts. On September 29, the Thai baht reached its highest mark against the US dollar since early 2022.

However, the strong currency has left Thailand in a dilemma.

After the Fed’s decision, the country’s Trade Minister Pichai Naripthaphan asked the Bank of Thailand to consider cutting interest rates – already at 2.5%, one of the lowest compared to its neighbors. He cited the need to stimulate investment and reduce the burden of household debt for ordinary Thais, currently accounting for 90% of Thailand’s GDP.

“Every time the US raises or cuts interest rates, it affects the flow of capital in and out of the Thai market. When US policy rates decrease, it will also cause the baht to strengthen, and vice versa,” Naripthaphan told local media in August.

The Bank of Thailand obliged, announcing surprise cuts for the first time in four years on October 16.

In a report published in September, the American credit rating agency Fitch Ratings said that the Fed will make four cuts until 2025. And the US central bank still expects another reduction before the end of the year.

As for ASEAN, central banks seem likely to be in step with the Fed. Sumual believes Bank Indonesia and Bank of Thailand will “follow suit,” further benefitting ASEAN emerging market portfolio assets.