US Banking Crisis Potentially Slows The Economy Of Developing Countries

New York, United States/ILLUSTRATION/UNSPLASH/Lyle Hastie PHOTO

JAKARTA - The United States (US) banking crisis has the potential to slow the pace of the economy of developing countries, including Indonesia.

Macroeconomic economist and financial market The Institute for Economic and Community Research (LPEM) of the Faculty of Economics and Business, University of Indonesia (FEB UI) Teuku Riefky said that in Jakarta, Thursday, the recent series of banking turmoil could affect the condition of developing countries in at least two ways.

First, through increased risks in global financial markets that encourage investors to divert their portfolios from assets that are relatively risky to safer assets.

"This can be seen from the increase in the US 5-year Credit Default Swap (CDS) and the volatility index as a proxy of increased risk and uncertainty," Riefky said as quoted by ANTARA, Thursday, May 4.

It is estimated that this has the potential to cause the market for developing countries to experience a weakening of the flow of incoming funds (inflows) or outflows.

Second, the continued trend of increasing interest rates by the US Central Bank or the Federal Reserves (The Fed) is likely to reduce Indonesia's export demand by the US, and also reduce Indonesia's imports from the US.

"In 2022, export share to the US will reach around 10 percent of total exports, while the import share is recorded at 4.9 percent of total imports. Therefore, the latest dynamics in the US banking sector is likely to affect, although in a subtle way, Indonesia's overall trade performance," said Riefky.

In addition, the turmoil of the US banking crisis also has the potential to have an indirect impact through rupiah depreciation which can make Indonesia's imports relatively more expensive.

However, Riefky continued, given the low openness of Indonesia's trade overall, 46 percent of Gross Domestic Product (GDP), the burden of the collapse of Silicon Valley Bank (SVB) in this case should not be so significant.