Trump Tariff Complications Risk Triggering Capital Outflows

JAKARTA, KOMPAS – The global stock market and the United States dollar index have plummeted following Washington's announcement of reciprocal tariffs on various countries. Market players are concerned that this policy could trigger an economic recession. Meanwhile, Indonesia must be vigilant about the outflow of capital due to the negative global sentiment.

The main stock indices of the United States (US) simultaneously recorded their deepest daily decline since 2020 at the close of the market on Friday (4/4/2025) early morning WIB. Companies listed on the S&P 500 index lost a market value of 2.4 trillion US dollars in a single day. At the same time, the Dow Jones index fell by 3.98 percent, while the Nasdaq led the decline on Wall Street with a drop of 5.97 percent.

A similar trend occurred in Asian stocks. Japan's Nikkei 225 fell by nearly 1,000 points or 2.75 percent. The Tokyo Stock Exchange weakened by 3.37 percent. Meanwhile, MSCI AC Asia Pacific declined by 1.19 percent.

Not only the stock market, but the US dollar index against other major currencies (DXY) also plunged to the level of 101.54, its lowest point throughout 2025. The exchange rates of several countries' currencies, including those of developing nations, strengthened against the US dollar.

The sell-off reflects market players' concerns about the risk of a global recession, especially in the US.

One of the main factors triggering the consecutive sell-off in the stock market and financial markets was the high import tariff policy announced by U.S. President Donald Trump at the White House, Washington DC, on Wednesday evening (2/4/2025) local time or early Thursday morning (3/4/2025) Jakarta time.

The sell-off reflects market players' concerns about the risk of a global recession, especially in the US.

The Chief Investment Officer at The Bahnsen Group, David Bahnsen, believes that Trump is likely to focus on several companies that invest significantly in the U.S., following his policies that have caused a sluggish stock market.

"If the current rates are in place, a recession in the second or third quarter is very likely. It is also very possible that the market will weaken," he said, as quoted by Reuters news agency.

US tariff policy has significantly changed the global economic outlook.

Credit rating agency, Fitch Ratings, in its official statement, said that the US tariff policy has significantly changed the global economic outlook.

Going forward, the risk of a US economic recession is expected to increase and the space for the US central bank, the Federal Reserve (The Fed), to further lower interest rates is increasingly limited.

According to Fitch, imposing a minimum tariff of 10 percent on all US trading partners and additional increases on some of its 57 trading partners could potentially increase the overall US effective tax rate (ETR) by 25 percent. This is the highest in more than 115 years.

ETR is the actual tax rate that must be paid by the company by taking into account various factors that affect the tax value. This means that the calculation is not just a normative rate but all factors that affect the tax value that is ultimately actually paid by the taxpayer.

Fitch also expects US economic growth in 2025 to be lower than 1.7 percent due to equity market volatility. US consumer spending growth slowed, especially in January and February 2025.

This condition in turn causes economic growth in other countries, especially in Asia, to slow down. Monetary and fiscal policy easing, in Fitch's opinion, could help target countries to offset the impact of higher US tariffs.

Indonesia is one of the countries that has not escaped the imposition of US tariffs. Indonesia will be subject to a 10 percent import tariff starting April 5, 2025, like all other US trading partners. However, starting April 9, Indonesia will be subject to a 32 percent tariff.

Senior economist at the Institute for Development of Economics and Finance (Indef), Mohamad Fadhil Hasan, said the recently announced tariff policy had triggered global uncertainty.

The assumption is that this policy has the potential to cause stagflation and a US economic recession in the short term but has the potential to encourage US economic growth in the long term.

However, this assumption is highly dependent on the response of several partner countries that are subject to high tariffs by the US government. Although the development tends to be dynamic, considering that the US has also opened a negotiation path, market players have responded negatively to the tariff policy.

"These two possibilities are still uncertain which will happen. I myself see it as still uncertain, still dynamic. Indeed, many parties say that tariffs are a policy that hurts itself (the US). However, Trump believes it is a transition. He (Trump) said, short-term pain, long-term gain," said Fadhil when contacted from Jakarta, Friday (4/4/2025).

In addition to the trade side, Fadhil continued, the Indonesian government should also anticipate the ripple effects of the US tariff policy in the financial sector. This is because this policy has also triggered negative investor sentiment in the global financial market.

Amid the increasing uncertainty, he reminded, the resilience of the domestic economy from external factors is in a vulnerable condition. This is evident from the weakening of the rupiah which tends to be triggered by domestic issues, such as Danantara, Free Nutritious Meals, and the Red and White Cooperative.

The resilience of the domestic economy to external factors is currently in a vulnerable condition.

Quoting Bloomberg, the rupiah in spot market trading, Friday (4/4/2025), opened at Rp16,660 per US dollar or strengthened by 0.66 percent compared to the previous day's opening. However, the rupiah exchange rate depreciated 3.27 percent on a calendar year basis, even breaking through the level of Rp16,700 per US dollar over the past few days.

According to Fadhil, the lack of communication regarding the clarity of government programs in turn raises public and investor anxiety. Therefore, it is important for the government to establish good communication with the public regarding the certainty of policies that will be implemented in the future.

"We should face external pressure with domestic resilience. If domestic policies are considered vulnerable, this could be even worse," he said.

Bright Indonesia economist Awalil Rizky reminded that global and domestic risk factors have the potential to cause speculation from market players. This means that capital owners will consider the security and profit aspects more amidst the current uncertain conditions.

Speculative factors determined by future risk perceptions, such as global political and financial uncertainty, risk causing capital outflows from Indonesia's financial markets. This condition in turn can cause domestic financial markets, including the rupiah exchange rate, to continue to be under pressure.

Based on settlement data from early 2025 to March 26, 2025, foreign investors recorded a net outflow of IDR 4.96 trillion in the domestic financial market.

This consists of Rp 32.02 trillion for non-resident net sales in the stock market, Rp 16.08 trillion for net purchases in the Government Securities (SBN) market, and Rp 10.98 trillion for net purchases in Bank Indonesia Rupiah Securities (SRBI).

According to Awalil, there is quite a lot of foreign capital in Indonesia at the moment that can easily and quickly leave at any time, namely portfolio investment and other investments. However, it is almost impossible for all or most of the capital flow to leave within a quarterly period.

The portfolio investments in question include stocks, corporate bonds, and Government Securities (SBN). Other investments include trade debt, loans, and money and savings in banks or financial institutions.

"Theoretically and technically, it is possible (to exit) up to 10 percent of the total of both (portfolio investment and other investments), or it could reach a value of 50 billion US dollars. If that happens, then it can be called a sudden reverse flow, because the tendency so far has been inflow," Awalil said.

The position of foreign capital in the form of portfolio investment in Indonesia increased by 36.11 percent in the last ten years to US$278.74 billion by the end of 2024. In the same period, the position of foreign capital in the form of other investments in Indonesia increased by 17.51 percent to US$177.86 billion.

In the last five years, Awalil continued, the trend of foreign capital inflows did not come in large amounts. In fact, it was outward although still in relatively small amounts in 2020 and 2022. Over the last five years, capital inflows were only 54.86 billion US dollars.

"An additional factor that needs to be watched out for is the flow of Indonesian capital that tends to flow out if foreign capital starts to flow out. So far, there has been a tendency for an increase in the outflow of Indonesian capital," he said.

Based on Bank Indonesia (BI) data, Indonesia's net international investment position at the end of 2024 was recorded at 245.29 billion US dollars, tending to decline. At the end of 2019, the value was 337.92 billion US dollars. At the end of 2014, the value was 383.97 billion US dollars.

In the last ten years, the position of foreign capital in Indonesia has increased by 31.1 percent to US$768.1 billion in 2024. Meanwhile, investment from domestic to overseas has increased by 158.93 percent to US$522.81 billion in 2024.