By Dr Lili Yan Ing, Secretary General of International Economic Association (IEA) and ERIA's Lead Advisor, Southeast Asia Region:  Lately, I have been asked over 30,697 times about the impacts of increased US debt on the Indonesian economy. Before addressing this question, let us briefly go through the US economy, its national debt, and how it has accumulated.

As the United States is documented as the world's largest economy, with a nominal GDP of USD 25.46 trillion in 2022, its economic policies have significant impacts on global markets. Any decisions that affect its monetary and fiscal policies can have ripple effects on economies worldwide. Following the United States, China, Japan, and Germany hold the positions of the second, third, and fourth largest economies, with GDPs of USD 18.1 trillion, USD 4.2 trillion, and USD 4.01 trillion, respectively.

The US increasing national debt has been a concern for many countries around the world, including Indonesia. The US ‘national debt’  is the total of the US government’s debt to its creditors, which can be private companies or other countries. The US debt is accumulated over time through borrowing, with the US government issuing government bonds to investors to fund its national spending.

There are at least three major causes of US accumulated debts: government spending, tax policies, and economic conditions.

One significant factor is the government's spending on continued government programs such as Defense, Social Security, and Medicare, as well as the cost of interest payments on existing debt. In 2022, the US spent about USD 1 trillion on defense including military equipment or half or the world’s total spending on it (or about the same size of the Indonesian economy). Second, US tax policies such as tax cuts which are usually adopted to lure investment can also contribute to higher levels of debt as they decrease government revenue while government spending remains the same. Last, in 2023, to mitigate the long-term impacts of Covid-19, the US government has committed USD 4.59 trillion to engaging in deficit spending to stimulate the economy, which can further add to the debt. Other factors of geopolitical tensions which cause increase global fuel, commodity and food prices will also affect the US government’s decision on the size of debt.

As of 2022, the US national debt was recorded at USD 30.9 trillion increased from USD 5.6 trillion in 2000, with the majority of the debt held by domestic investors and the US government. In February 2023, the total national debt reached a record high of USD 31.46 trillion. 

So how does the increased US national debt affect the Indonesian economy?

First, one of the primary impacts is on the value of the US dollar. The US dollar is the world's reserve currency, meaning that many countries, including Indonesia, hold significant amounts of US dollars in their foreign exchange reserves. As the US national debt increases, it can cause a decrease in the value of the US dollar, which can negatively impact countries that hold large amounts of US dollars. In Indonesia, a weaker US dollar can lead to inflation and higher import costs, as many goods are priced in US dollars. This can be particularly challenging for developing economies like Indonesia, which rely heavily on imported goods to fuel their growth. As such, any significant changes to the value of the US dollar can have a significant impact on the Indonesian economy.

Indonesia's foreign exchange reserves in January amounted to USD 144.2 billion in April 2023 (or equivalent to 6.3 months of total imports) with over 80% of it in US dollars, and thus, any significant changes to the value of the US dollar can have a significant impact on the value of Indonesia’s reserve and thus the Indonesian economy. A weaker US dollar can lead to higher import costs and loan instalment interest rates, as the Indonesian trade financing is mostly -if not all- priced in US dollars. This dollar domination in trade financing, any changes in the price of US dollars will be particularly challenging for importers, including Indonesia. 

Second, the increased US debt can also affect the Indonesian economy through interest rates. As the US government issues more debt, it needs to pay higher interest rates to investors to attract buyers. This can cause interest rates to rise in other countries, including Indonesia as mostly stand as borrower. Higher interest rates can lead to a decrease in investment and slower economic growth, as borrowing becomes more expensive. As of January 2023, Indonesia recorded a total external debt of USD 404.9 billion or about 30.1% of Indonesia’s GDP.

Third, the increased US debt can lead to higher levels of uncertainty in global financial markets. As the US government's debt load grows, investors may become concerned about the country's ability to pay off its debts, leading to a decrease in demand for US treasury bonds. This can lead to a decrease in the value of the US dollar, as well as increased volatility in global financial markets. For Indonesia, which relies heavily on foreign investment to fuel its growth, increased uncertainty can lead to a decrease in foreign investment, slower economic growth, and increased risk of financial instability.

In close, the increased US debt can have significant impacts on the Indonesian economy: changes in the value of the US dollar and interest rates and increased uncertainty in global financial markets. As such, it's important for the Government of Indonesian government to closely monitor developments in US monetary and fiscal policies, be prepared of the worst scenarios of the US and global economy and take necessary actions to mitigate any negative impacts on the Indonesian economy.

While the US national debt may seem a distant concern for many Indonesians, its impacts are real and will have significant consequences for Indonesian economic growth and stability.

This opinion piece was written by Secretary General of International Economic Association (IEA) and ERIA's Lead Advisor, Southeast Asia Region, Dr Lili Yan Ing, and has been published in Jakarta Post. Click here to subscribe to the monthly newsletter.

Disclaimer: The views expressed are purely those of the authors and may not in any circumstances be regarded as stating an official position of the Economic Research Institute for ASEAN and East Asia.

(Photo source: iStock)