As the US is documented as the world's largest economy, with a nominal gross domestic product (GDP) of US$25.46 trillion in 2022, its economic policies have significant impacts on global markets. Any decisions that affect its monetary and fiscal policies can have ripple effects on economies worldwide.

Following the US, China, Japan and Germany hold the positions of the second, third and fourth largest economies, with GDPs of $18.1 trillion, $4.2 trillion and $4.01 trillion, respectively.

The US’ increasing national debt has been a concern for many countries around the world, including Indonesia. The US “national debt” is the total of the US government’s debt to its creditors, which can be private companies or other countries. The US debt is accumulated over time through borrowing, with the US government issuing government bonds to investors to fund its national spending.

There are at least three major causes of US accumulated debts: Government spending, tax policies and economic conditions.

One significant factor is the government's spending on continued government programs such as Defense, Social Security and Medicare, as well as the cost of interest payments on existing debt. In 2022, the US spent about $1 trillion on defense, including military equipment, or half of the world’s total spending on it (or about the same size as the Indonesian economy).

Second, US tax policies such as tax cuts which are usually adopted to lure investment, can also contribute to higher levels of debt as they decrease government revenue while government spending remains the same. Last, in 2023, to mitigate the long-term impacts of COVID-19, the US government has committed $4.59 trillion to engage in deficit spending to stimulate the economy, which can further add to the debt.

Other factors of geopolitical tensions, which cause increases in global fuel, commodity and food prices will also affect the US government’s decision on the size of debt.

As of 2022, the US national debt was recorded at $30.9 trillion, up from $5.6 trillion in 2000, with the majority of the debt held by domestic investors and the US government. In February 2023, the total national debt reached a record high of $31.46 trillion. 

So how does the increased US national debt affect the Indonesian economy?

First, one of the primary impacts is on the value of the US dollar. The US dollar is the world's reserve currency, meaning that many countries, including Indonesia, hold a significant amount of the US dollar in their foreign exchange reserves. As the US national debt increases, it can cause a decrease in the value of the greenback, which can negatively impact countries that hold large amounts of US dollars.

In Indonesia, a weaker US dollar can lead to inflation and higher import costs, as many goods are priced in US dollars. This can be particularly challenging for developing economies like Indonesia, which rely heavily on imported goods to fuel their growth. As such, any significant changes to the value of the US dollar can have a significant impact on the Indonesian economy.

Indonesia's foreign exchange reserves amounted to $144.2 billion in April 2023 (or equivalent to 6.3 months of total imports) with over 80 percent of it in the US dollar, and thus, any significant changes to the value of the US dollar can have a significant impact on the value of Indonesia’s reserve and thus the Indonesian economy.

A weaker US dollar can lead to higher import costs and loan installment interest rates, as the Indonesian trade financing is mostly, if not all, priced in US dollars. This dollar domination in trade financing, any changes in the price of the US dollar will be particularly challenging for importers, including Indonesia. 

Second, the increased US debt can also affect the Indonesian economy through interest rates. As the US government issues more debts, it needs to pay higher interest rates to investors to attract buyers. This can cause interest rates to rise in other countries, including Indonesia, as mostly stand as borrowers. Higher interest rates can lead to a decrease in investment and slower economic growth, as borrowing becomes more expensive. As of January 2023, Indonesia recorded a total external debt of $404.9 billion, or about 30.1 percent of its GDP.

Third, the increased US debt can lead to higher levels of uncertainty in global financial markets. As the US government's debt load grows, investors may become concerned about the country's ability to service its debts, leading to a decrease in demand for US treasury bonds. This can lead to a decrease in the value of the US dollar, as well as increased volatility in global financial markets.

For Indonesia, which relies heavily on foreign investment to fuel its growth, increased uncertainty can lead to a decrease in foreign investment, slower economic growth, and increased risk of financial instability.

In sum, the increased US debt can have significant impacts on the Indonesian economy: changes in the value of the US dollar and interest rates and increased uncertainty in global financial markets. As such, it's important for the government to closely monitor developments in US monetary and fiscal policies, be prepared for the worst scenarios of the US and global economy, and take necessary actions to mitigate any negative impacts on the Indonesian economy.

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The writer is secretary-general of the International Economic Association (IEA) and lead advisor at the Southeast Asia Region, Economic Research Institute for ASEAN and East Asia (ERIA). The views expressed are her own.