Federal Reserve Chair Janet Yellen\'s news conference appears on a television screen on the floor of the New York Stock Exchange, Wednesday (15/3), 2017. The Fed\'s key short-term rate is rising by a quarter-point to a still-low range of 0.75 percent to 1 percent.
JAKARTA, KOMPAS — Morgan Stanley estimates that the US central bank (the Federal Reserve) will raise its benchmark interest rate seven times this year and next year.
Not all of the Fed’s monetary tightening policies will have the same impact. The tightening cycles of 2004-2006 and 2013-2014 differed in their impacts. In 2004-2006, the Fed tightening showed a more benign impact on the economies of emerging countries, such as Southeast Asia.
At that time, the pressure on external funding was limited, because there had been an improvement in the balance of payment after the financial crisis. In other words, these countries did not rely on foreign funding for domestic financing. The exports to developed countries were encouraging.
In 2013-2014, the situation was different. There was funding pressure for some countries due to the weakening of the current account. Some even suffered a deficit.
Meanwhile, exports also weakened. In May 2013, the Fed announced it would stop buying bonds. The termination of the bond purchase began in January 2014 and was completed in October 2014. At that time, the interest rate was unchanged, the yield 10-year of US bonds rose by 140 basis points in late April 2013, reaching a peak of 3 percent by the end of December 2013, before trimming was really begun.
Meanwhile, real yields increased 100 basis points to 1.5 percent in the same eight-month period. "We think the tightening in 2017-2018 will be in between the two previous cycles.
The increase in the Fed funds rate will adversely affect the country in ASEAN, while the external trade gaps of Korea and Taiwan have been narrowed. For some countries that suffer a deficit, the difference in real interest rates is higher," Morgan Stanley analyst Tan Deyi and colleagues said in a report issued late last week.
Improving economic fundamentals in developing countries will help counter the Fed tightening. The export momentum does look better than in the period 2013-2014, but not as good as in 2004-2006. Several factors will determine the impact of Fed tightening in developing countries.
Four times
Bank Danamon chief economist Wisnu Wardhana said the increase in the federal funds rate had already been anticipated by the market. They estimated that the Fed would increase the rate four times this year, and with the softer signals from the Fed, the median estimate of three increases has not changed.
"The result is a weaker US dollar index, and the funds are flowing everywhere, including to developing countries," Wisnu said. The inflows of foreign funds into the local stock market intensified in the past week. Market capitalization reached a record high at Rp 6,018 trillion as the stock index reached its highest level at 5,540 points last week.
The average value of transactions last week also rose by a significant 46.4 percent to Rp 9.17 trillion from Rp 6.26 trillion in the previous week. The average daily transaction volume also increased by 27.6 percent to 14.4 billion shares.
