Threat of US Debt Default & Perceptions of Hawkish Federal Reserve Disrupted Indonesian Assets

However, pressures on Indonesian assets (the rupiah and Indonesian stocks traded on the Indonesia Stock Exchange) suddenly emerged in May 2023 as a consequence of developments in the US. Firstly, there was the risk of a US debt default in case US Congress would fail to agree on raising the debt ceiling. Secondly, financial markets increasingly speculated that the Federal Reserve may lift its benchmark interest rate again in June 2023 as recent US inflation and consumer spending data showed a rise. So, let’s zoom in on both these issues as they caused quite some anxiety in markets.

Threat of a US Debt Default

In May 2023 there emerged concern over whether the US would default on its USD $31.4 trillion debt, which would bring yet another unprecedented situation if it were to unfold, as the White House and Republicans in the House of Representatives had trouble reaching an agreement. And so, for almost a month markets were plagued by a high degree of uncertainty stemming from this issue.

Why is the debt ceiling important? This debt ceiling, set by Congress, is a cap on the total amount of money that the US government is allowed to borrow via US Treasury securities (including bills and savings bonds) to meet its financial obligations. As the US typically runs a budget deficit each year, it has to borrow huge sums of money to pay all of its bills, issuing large volumes of Treasury securities. This caused the US to hit its technical debt limit on 19 January 2023 when the US Treasury Department started using extraordinary measures to continue paying debt obligations.

Although it caused some anxiety it was highly unlikely to see an actual default as that would have massive consequences for the US economy. A default would mean the US government becomes unable to borrow more money or pay all bills (including its social insurance payments and the salaries of its federal and military employees). It would then need to select which debt it prioritizes. Obviously it would also deliver a blow to markets’ confidence in US assets. For example, the US Treasury bond (which is typically perceived as risk-free) would suddenly start carrying a level of risk. And this would have significant consequences throughout financial markets.

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This is part of the introduction of the article. The full article is available in our May 2023 report (an electronic report). This report can be ordered by sending an email to [email protected] or a message to +62.882.9875.1125 (including WhatsApp).

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