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Is Indonesia managing foreign debt prudently?
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Smooth ride: An MRT train pulls into ASEAN Station in South Jakarta on April 1, 2019. The long-awaited public railway network is among the infrastructure projects developed with foreign debt. (JP/Dhoni Setiawan)
T
o finance the economy, Indonesia has been experiencing a shortage of funds. The classic problem is that the balance of domestic savings is never enough to meet development financing needs. So the debt is needed to plug the deficit.
But the problem is domestic debt is apparently still lacking. Therefore, foreign debt becomes an option. Moreover, the cost of external debt is sometimes cheaper than debt to domestic creditors.
External debt has two sides of a coin. In addition to providing benefits, external debt also has adverse effects, especially if external debt withdrawals are uncontrolled or excessive and their management is not prudent. Many examples of countries exposed to severe crises caused by heavy external debt burdens include Greece and Argentina. Our country experienced it during the Asian financial crisis in 1997 and 1998.
Lately, attention to our external debt has intensified and triggered a debate after the Indonesian ULN Statistics (SULNI) data released by Bank Indonesia (BI) shows that the growth of external debt is likely to continue to increase. In October 2019, Indonesia’s external debt reached Rp 5.61 quadrillion (US$400.6 billion at an exchange rate of Rp 14,000 per US dollar), up by 11.9 percent from the same period in 2018.
The external debt growth is quite high compared to loans from commercial banks, which only grew 6.76 percent, and the issuance of capital market instruments, which expanded 6.98 percent.
More than a matter of high growth, external debts, especially those owned by nonfinancial corporations, have become one of the main sources of vulnerability that has the potential to disrupt the resilience of a national financial system. Other sources include the performance of nonfinancial corporations, which is declining (Financial Stability Review, September 2019).
We have to closely watch this development. The reason is that indebted corporations face the risk of increasing exchange rate volatility and eventually default if the rupiah exchange rate against the greenback plunges. As a result, banks would be exposed to credit risk.
