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Analysis: US election result and its impact on Indonesian economy

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by November 16, 2016 General


Last week, prominent businessman Donald J. Trump was elected the 45th US president, against popular polls that predicted a victory for former US secretary of state and first lady, Hillary Rodham Clinton. While the result was seemingly surprising to the rest of the world, Trump’s victory is perceived by the Americans as a way to build a better domestic economic system. But what does that mean to the rest of the world, including Indonesia?

On the day Americans went to the voting stations, Asian equity markets fell as investors swayed toward risk-averse modes amidst heightened market uncertainty. The following day, money markets also tumbled as a follow-up reaction. During his campaign, Trump mentioned his economic policies, which would include new trade barriers, higher import taxes, a better employment market for the Americans and a tax-cut plan. The domestic-laden plan is perceived as protectionism by international investors, almost equivalent to the reaction to the Brexit vote back in April.

With such greater risks of uncertainty, global financial market volatility could continue until the president-elect selects his cabinet members and puts out his policies in January. However, global monetary policy would also be in a wait-and-see mode, which is a good way to reduce risks. A US Federal Reserve rate hike would likely be paused until further development of economic policies has been unveiled. Hence, we also expect our central bank would follow suit by limiting any policy decision to intervene in the market only to manage currency volatility until end of this year. Indonesia needs to remain vigilant as its foreign exchange market is still considered shallow compared to its regional peers.

Looking into the list of economic policies that are expected to be implemented by the next US president, trade barriers and import tax policies would have the most impact on global economic conditions. Although Mexico and China had been mentioned as the targeted countries for these policies, Indonesia is not exempted from the spillover risk. Both the US and China are major Indonesian trading partners and any change in the country’s bilateral dynamics could impose weakening trade trends.

Indonesia’s exports to the US have been rising for the past three years and it became the country’s top export destination, the Central Statistics Agency’s (BPS) September trade data shows. The main export products include coffee, cocoa, textiles, electronic products, shrimp, rubber products and footwear. The total export value was US$8.7 billion in September.

On the other hand, by looking at the softening demand from China in the past couple of years, we expect a further slowdown of China’s export numbers. With China becoming a target for higher import tariffs, it would open opportunities to other trade partners to fill the gap. Unfortunately, manufacturing is not one of Indonesia’s strengths and we would not be able to take advantage of the opportunity unless we can catch up with the development in a short time span.

However, this risk is seen as controllable in the longer run. The growth of Indonesia’s gross domestic product (GDP) is still domestic-oriented and dominated by private consumption. A sensitivity test done by Mandiri Sekuritas shows that every 1 percent increase of the US economy only contributes 0.05 points to Indonesia’s growth and vice versa.

Another point to be considered is the possibility of the US pulling out of the Trans-Pacific Partnership (TPP). The TPP was initiated by the US and involves 11 other countries: Malaysia, Vietnam, Singapore, Australia, Mexico, Canada, Japan, Brunei, Chile, New Zealand and Peru. By lowering tariffs for a broad variety of products, the members hope to increase trade and economic growth, encourage transparency and competitiveness and improve the manufacturing sectors of the member countries.

The debate about whether Indonesia will benefit if the government decides to take part in the Trans-Pacific Partnership (TPP) has been ongoing since last year. The free trade initiative is perceived to be beneficial as it could make Indonesian manufacturing industries more vibrant, its exports more competitive and its economy bigger.

However, with the US’ plan to renegotiate or even pull out of the deal, Indonesia would have more time to consider how to reinvigorate its export-oriented and manufacturing industries as it potentially could be one of the contributing factors that can boost Indonesia economic stability in the real sector and in the long run.

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The writer is a public policy analyst and researcher at the Mandiri Institute, an independent research think tank of Bank Mandiri that focuses on public policy and the financial and banking sectors.

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