Debt Issue: Pay More Than Borrow

Photo by DJPPR

Indonesian Government pays more for debt, than borrows, in past two years.

JAKARTA (TheInsiderStories) – Robert Pakpahan, General Director of Risk and Financing Management at the Finance Ministry, said Government mulls to seek additional multilateral loan up to US$1 billion from World Bank (WB), KWF Germany and Asian Development Bank (ADB) to finance the deficit budget for 2017.

He however noted that overall this still will be negative because Indonesia pays more than what it borrows. And this trend was happening in past two years. For example Government took loan of Rp68 trillion from WB, but paid Rp70 trillion to the multilateral agency.

Recently, Bank Indonesia (BI) has released the update on the country’s external debt per April this year. It said Indonesia’s foreign debt reached $328.2 billion, up 2.4 percent year on year (y/y) but slower compared to 2.9 percent rise y/y in previous month (March).
Debt of public sector grew 9.2 percent y/y to $167.9 billion, slower growth compared to 10 percent y/y in March 2017. While debt of private sector declined 3.9 percent to $160.3 billion y/y in April. In previous month (March), private’s debt fell 3.6 percent.
The hike in the U.S’s Federal Reserves rates would have lifting the borrowing cost for dollar debt and this might have prompted private sector to reduce external debt.
For the first quarter (Q1) of 2017, the central bank had reported that Indonesia’s external debt amounted to $326.3 billion, grew controllably at 2.9 percent (y/y) or slightly increased than 2.0 percent (y/y) in the previous quarter.
The increased external debt was influenced by a lesser contraction of private sector external debt at -3.6 percent (y/y) compare to -5.5 percent (y/y) in the previous quarter. Meanwhile, public sector external debt growth slowed down from 11.0 percent (y/y) in Q4 2016 to 10.0 percent (y/y) in Q1 2017.
At the end of Q1 2017, the outstanding of public sector external debt amounted to $166.5 billion (51 percent of total external debt), while private sector external debt stood at $159.9 billion (49 percent of total external debt).
With this development, the external debt to gross domestic product (GDP) ratio at the end of Q1 2017 was relatively stable at 34 percent as at the end of Q4 2016, but decreased from 37 percent at the end of Q1 2016.
BI views the development of external debt at the end of Q1 2017 remains healthy but continues to be vigilant about the risks to the national economy. The Bank said it will persevere to monitor the development of external debt, particularly the private sector external debt, intended to give assurance that the external debt can play an optimal role in supporting development financing without incurring the risks that may affect macroeconomic stability.
Scenaider Siahaan, Director of Strategic and Debt Portfolio Directorate General of Finance and Risk Management of the Ministry of Finance, explained that Government needs to seek additional loan for funding the budget deficit this year, expected to reach 2.6 percent over the gross domestic product (GDP), which is widened from initial target 2.41% percent set on the State Budget for 2017.
The revised State Budger for 2017 will have new target of budget deficit 2.6 percent. The said the revise budget is expected to get approval of the House of Representatives by mid-July.
Scenaider added, that Government will also add the portion of bond issue, especially the foreign currency bonds, from current 25 percent to 30 percent of total portfolio of foreign bond issuance. This month, Government has planned to issue Euro bond.
Indonesian Government has issued Rp380.4 trillion domestic bond as of June 14, 2017, representing 55.5 percent of this year’s target worth of Rp684.8 trillion. Meanwhile the outstanding debt reached Rp3,667.4 trillion or nearly 27 percent of GDP as end of April.
Outstanding debt, includes all government infrastructure projects guarantee, to GDP ratio is below 33 percent, considerably conservative and relatively safe. While the maximum debt to GDP ratio is 60 percent as stipulated in Law No. 17 Year 2003 on State Finance.
But the challenge is that major debt will be allocated to the productive sector, then the so-called primary deficit level would be a concern. Now Indonesia’s primary deficit reaches at 1 percent, meaning that Government utilizes debt for paying debt interest.
We should question about the possibility for Government in realizing its target to reduce the primary deficit level from 0.8 percent this year to 0.6 percent next year, or to zero in 2021. Will the recent rating upgrade for Indonesia — to the investment grade — by Standard & Poors (S&P) help pursue a cheaper cost of financing?
Government wants to no longer issue debt securities to paying debt interest by 2021, if the primary deficit would be at zero.
Mr. Pakpahan said, Government is not aggressive for issuing bonds during the first half (H1) this year, only issuing samurai bond worth 100 billion yen and global Islamic bonds worth of $3 billion.
Government of Indonesia targets to global bonds worth $10 billion this year, equivalent Rp130 trillion, representing 20 percent of total target. While the issuance of global Sukuk is targeted for around Rp160 trillion equivalent or 29 percent of target this year.
He explained, that Government has no plan to buy back foreign bonds though current bond’s yield tend to lower, while current outstanding foreign bond carries a fixed rate coupon. Noting, the rating upgrade by S&P has benefited Indonesia, boosting the capital inflow (hot money) and reducing the debt risk.
The local currency, Rupiah, also gets stronger against the US dollar. Per June 21, the foreign bond portfolio in Indonesia reached Rp764.21 trillion, grew by 14.78 percent year to date.
I Made Adi Saputra, fixed-income analyst at MNC Securities, said foreign investors have since early this year bought the government’s bond along with the expectation over the rating upgrade from S&P.
The stable rupiah, at Rp13,000-13,300 level, is also positive factor prompting foreign investors to have confidence on putting their money in the state securities. Now the foreign investment in government bond reaches 39.33 percent, from 37-38 percent portion before rating upgrade by S&P.
Previously, Finance Minister Sri Mulyani Indrawati has said the benchmark yields of SBN have declined around 4 basis points following the rating upgrade by S&P, helping to reduce debt exposure. The stronger rupiah would also reduce debt. (EV/YW)