Southeast Asian economies may benefit from Federal Reserve rate cuts.

• Emerging markets have traditionally faced negative consequences when U.S. rates are higher, as investors tend to send their dollars back to the U.S. in search of better returns.
• When U.S. rates ease, it can lead to increased inflows into emerging markets' economies.

The decision by the U.S. Federal Reserve to lower interest rates in September, with more cuts anticipated, could benefit Southeast Asian economies that are still developing.

Saurabh Agarwal, head of Southeast Asia private equity at Warburg Pincus, stated on CNBC's "Squawk Box Asia" last month that he is very confident and optimistic about the rate cuts and believes that these markets will return to their 6-7% real GDP growth trajectory in the near term.

His confidence is matched by economists and finance officials across the region.

Bank Central Asia's chief economist, David Sumual, stated that Indonesia is a country that can benefit from both short-term and long-term Fed policy.

The upcoming Chinese fiscal stimulus may lead to a potential rally in commodity prices, benefiting Indonesia mainly through commodity channels. Additionally, Indonesia may experience higher portfolio inflows, particularly for stocks, although the impact may be limited due to renewed demand on the Chinese stock market.

Emerging markets have traditionally faced negative consequences when U.S. interest rates are higher, as U.S. investors tend to send their dollars home in search of better returns. This puts pressure on currencies and can make it challenging for emerging market central banks to control inflation.

When the U.S. rates ease, it can lead to increased flows into emerging markets' economies. Additionally, global commodities, which are crucial to many emerging markets, tend to increase in price when the Federal Reserve adopts a more dovish outlook.

Indonesia's surprise

In the current climate, Indonesia and Thailand's central banks are adjusting their strategies following the recent Fed rate reduction.

Before the Fed announced its benchmark interest rate cut, Bank Indonesia surprised everyone by making its first rate cut in three years.

Henry Wibowo, head of Indonesia research and strategy at JPMorgan, stated on CNBC's "Squawk Box Asia" that Indonesia, located in Asia, will be one of the primary beneficiaries of any U.S. rate cuts.

The banking sector is a significant contributor to the Jakarta composite index, and we anticipate that banks will receive portfolio inflows, which should increase their multiples and boost their value, according to finance professionals.

Historically, Indonesia's interest rates have mirrored the Fed's due to the close correlation between global cash flows and currency fluctuations, as stated by Sumual.

Bank Indonesia typically follows the Fed in reducing its policy rate, but the Bank of Indonesia (BI) could have cut the BI rate during the September 24 meeting prior to the US Federal Open Market Committee meeting due to the significant increase in the value of the Indonesian rupiah.

Sumual suggested that the BI might delay its rate cut campaign until the Fed makes additional cuts, as the central bank tries to strike a balance between its stability-oriented monetary policy and growth-oriented macroprudential policies.

The Fed's decision led to the strengthening of both currencies, with investors shifting large sums of money from U.S. government bonds to Southeast Asia's developing markets.

The Thai baht strengthened against the U.S. dollar on Sept. 29, reaching its highest mark since early 2022.

Thailand's dilemma

Despite having a strong currency, Thailand faces a dilemma.

The Commerce Minister of Thailand, Pichai Naripthaphan, urged the Bank of Thailand to consider lowering interest rates, which are currently at 2.5%, in order to boost investments and ease the financial strain on households, whose debt accounts for 90% of Thailand's GDP.

The flow of capital in and out of Thai markets is affected by the U.S.'s policy rate. When the U.S. raises or cuts interest rates, it causes the baht to strengthen or weaken, respectively.

The Bank of Thailand made a surprise cut on Oct. 16, ending a four-year streak of no changes.

Fitch Ratings predicts that the Fed will make four cuts by 2025, with another reduction expected before the end of the year.

It is predicted that central banks in ASEAN will align with the Fed's actions. According to Sumual, both Bank Indonesia and Bank of Thailand will follow suit, which will positively impact the emerging market portfolio assets in ASEAN.