Fed Rate Hike & China Slowdown. What is the Impact on Emerging Markets?
With a staggering 271,000 jobs added to the US economy in October, exceeding forecasts by a big margin, while the US unemployment rate eased to 5.0 percent, the majority of analysts and market participants now expect to see a 25 basis points Fed Fund Rate hike in December (markets are currently pricing in a 70 percent chance of a December US rate hike). Meanwhile, trade data from China underscore the persistent economic slowdown in the world's second-largest economy. What are the effects of these issues on Indonesian assets?
China's October imports fell 18.8 percent (y/y) to USD $130.8 billion, while the country's exports declined 6.9 percent (y/y) to USD $192.4 billion. Further weakening trade data from China undermine the so-called "commodity currencies", which includes the Indonesian rupiah. Over half of Indonesia's export consists of (mainly raw) commodities, hence weakening demand from China (the key trading partner of Indonesia) curtails Indonesia's foreign exchange earnings.
China's 18.8 percent decline in imports is a very worrisome figure for China's trading partners in Southeast Asia. Evan Lucas, IG Market Strategist, said in an interview to Bloomberg that countries such as Indonesia will need to look elsewhere to offset the negative impact of falling exports to China.
US non-farm payrolls surged by a staggering 271,000 in October, significantly up from weak figures in the preceding two months. Combined, US non-farm payrolls are now coming in line with the Fed's target of seeing around 200,000 jobs added to the US economy each month. Evan Lucas said equity markets now "expect it [a 25 basis points Fed rate hike in December] to happen" and does not expect to see market hysteria as during the taper tantrum.
US Non-Farm Payrolls:
The two big questions according to Lucas are what impact the December US rate hike will have on the US dollar (which is now re-basing against the euro, the pound and - to some extent - the yen) and, secondly, what the impact of the rate hike will be on emerging markets. There is certainly the risk of capital outflows from emerging markets, including Indonesia. In fact, Lucas regards Indonesia to be the "epicenter of pressure" in such a scenario (similar to situation during the taper tantrum in 2013), followed by Malaysia, Thailand, and Vietnam. Asian central banks may react by raising benchmark interest rates but that will only accelerate the appreciation the US dollar and accelerate capital outflows from emerging markets, Lucas said. Moreover, these countries assembled quite some US dollar-denominated debt in recent years and this is expected to be the main theme of 2016.
Based on the latest data from Bank Indonesia, Indonesia’s total foreign debt stood at USD $303.2 billion in August 2015, consisting of USD $134.0 billion public sector foreign debt and USD $169.1 billion private sector foreign debt. Indonesia’s private sector foreign debt rose three-fold between end-2005 and 2014, surpassing the level of public sector external debt in 2012.
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