As the defense minister, presidential candidate Prabowo Subianto knows a thing or two about big-ticket items in state expenditure, and while he hailed Indonesia’s relatively low debt-to-gross domestic product (GDP) ratio as an accomplishment of the current administration, he appeared to construe that also as an opportunity to take up a lot more debt.

Today, the ratio is just below 40 percent of GDP. According to Prabowo, “we could go up to 50 percent. No problem there.”

During the same debate, rival presidential candidate Anies Baswedan proposed the exact opposite, namely to push the ratio down all the way to “a maximum of 30 percent of GDP”.

Analysts speaking to this paper have cautioned against both, as too high a government debt ratio comes with the risk of diminishing market confidence in Indonesia’s fiscal stability, while too low a ratio could hinder overall economic development.

The third candidate, Ganjar Pranowo, did not stipulate any target for the debt-to-GDP ratio during the debate, which appears wise given that the topic is far too complex and involves too many factors to be reduced to a single number.

In comparison to developed economies and even other emerging markets, Indonesia’s debt-to-GDP ratio is low indeed at around 39 percent, according to IMF data for 2022. That compares with 54 percent in Thailand, 60 percent in Malaysia, 81 percent in Brazil and 110 percent in the United States.

It is important to note that Indonesian law sets a hard cap for government debt at 60 percent of GDP, and in light of Indonesia’s economic history, it would be imprudent to go anywhere near that level.

The 1997-1998 Asian financial crisis entailed a build-up of national government debt that soon saw things spiral out of control when the debt-to-GDP ratio shot up to almost 90 percent.

Getting close to 60 percent, therefore, would spook financial markets, but any rate that stays well clear of that level, whether 30 percent, or 42 percent, or even 50 percent, in and of itself, should not cause alarm, if it is economically justifiable and well communicated.

Other factors come into play as well, such as whether a state borrows from the domestic market or from abroad, which often entails exchange rate risks. Japan’s exceptionally high rate at 214 percent, for instance, is less worrying than the number itself suggests thanks to the fact that most of it is sourced domestically at very low interest rates.

Not to sound overly nonchalant, but rather than wasting time discussing debt levels, we should be talking more about how to spend public funds, whether borrowed or not. The quality of spending largely determines whether a debt is sensible or not. For instance, borrowing to buy a house is considered sensible, borrowing to go on a vacation not so much, and borrowing to play roulette is outright foolish.

The key to affordable borrowing for the state is to convince market participants that sensible managers are on the job, both at the Finance Ministry and the central bank. The level of confidence in the government’s budget management directly impacts borrowing costs, as a lack of confidence slaps a risk premium on the coupon of government bonds.

It is no secret that investors’ confidence in Indonesia’s fiscal and financial market stability is partly owed to the leadership of the Finance Ministry and Bank Indonesia, and many will be hoping for continuity in that regard.

On the basis of such trust, public debt for the purpose of economic development can be both justified and affordable. Increased borrowing to develop infrastructure for Indonesia’s future capital city, for example, should entice more private-sector engagement and generate multiplier effects.

Without it, Indonesia’s 2045 Vision may remain just that.