Government Debt is Quite Healthy, but still Risky

Photo by Cabinet Secretary

JAKARTA (TheInsiderStories) -JAKARTA – The Indonesian government debt continues to increase at least in the past two years in line with the increase of infrastructure spending. As President Jokowi’s economic policy emphasizes on the supply side through infrastructure development.

According to data from the Ministry of Finance, that government debt position in May 2017 reached Rp3,672.33 trillion, comprised of government bond Rp2,943.73 trillion (80.2% of total bond) and loans Rp728.60 trillion (19.8 %). The debt increased by Rp1,063.55 trillion or 40.77% compared to Rp2,608.78 trillion by end 2014 when Jokowi took office.

For 2017, the government allocated Rp387,3 trillion for infrastructure spending, higher than Rp317.7 trillion in 2016 and Rp290.3 trillion in 2015.

The government currently has 247 list of national strategic projects with estimated investment need of more than Rp4,000 trillion using, funded by state funds, public-private partnership (PPP), and private fund.

Finance Minister Sri Mulyani Indrawati claimed the government debt as remain healthy in current time and it mostly finances the productive activities. With deficit of budget set around 2.5 percent over the Gross Domestic Product (GDP), Indonesian economy could grow above 5 percent, Sri Mulyani said.

“The government’s debt to GDP ratio is still below 30 percent and the budget deficit is around 2.5 percent, lower compared to other G-20 countries,” she said.

The government is committed to maintaining and managing its debt prudently and complying the law. By Indonesian law, the budget deficits of the central government in one year could not exceed 3 percent of GDP and the ratio of debt to GDP is set maximum 60 percent. This law is part of Indonesia prudent fiscal policy approach after the traumatic experiences of the Asian Financial Crisis in the late 1989.

The ratio of Indonesian government debt to GDP is the second lowest among G-20 member countries after Russia (17 percent). While the highest ratios implemented by Japan (250.4 percent), Italy (132.60 percent), and USA (106.10 percent).

Sunarsip, Chief Economist at PT Bank Bukopin Tbk, said the increase of government debt is a consequence of the growing Indonesia economy capacity which requires more financing. The increase in debt should not be seen in absolute way, he said.

“The ratio of government debt to GDP is still far below 60 percent, precisely around 30 percent. While the deficit of state budget (APBN) is still maintained below 3 percent. This means that government debt has been well managed actually,” Sunarsip said.

The government has controlled debt risk since 2011. Currently, the ratio of debt over a variable rate recorded at 11.3 percent and the debt portion in foreign currency reaches 40.9 percent, with average time to maturity (ATM) of 8.9 years. Some 38.6 percent of outstanding debt will mature within 5 years.

But the risk from government debt lies in the utilization of government debt to economy. This is reflected in the primary balance that continues to record deficit since 2012 (Rp52.8 trillion). This deficit consistently expanded to Rp98.6 trillion in 2013, Rp93.3 trillion in 2014, Rp142.5 trillion in 2015, and Rp105.5 trillion in 2016. For 2017, the primary balance’s deficit is targeted at range of Rp144-178 trillion.

Primary balance is defined by the Organization for Economic Co-operation and Development (OECD) as government net borrowing or net lending, excluding interest payments on consolidated government liabilities. If the primary balance recorded a surplus, the debt will decrease and vice versa. In short, the deficit in primary balance will reduce the government’s fiscal capacity, including for debt repayments to investors.

Sri Mulyani has ambition to turn deficit of primary balance to surplus in 2018, at around 0.4-0.5 percent to GDP. The former managing director of World Bank also targets to lower state budget deficit to 1.9-2.3 percent in 2018, and maintaining it at below 2 percent in 2020-2021. She also clearly rejected the idea of widening the state budget deficit above 3 percent through the revision of Law on Public Finance. Sri Mulyani prefers to improve the quality of government spending that amounts more than Rp2.000 trillion.

For government, fiscal management is very important to give confidence for foreign investors because they hold 38 percent of total outstanding government debt. Chief Economist of SIGC, Eric Sugandi said the ownership of government bond by foreign investors is a risk although the ratio of total government debt to GDP ratio is still quite low. He suggests the government to enlarge domestic investors including retail investors to reducing the volatility.

Recently, the government plans to widening state budget deficit from 2.41 percent to 2.92 percent to GDP because the achieved tax revenue is still far from target. While the government spending goes up, especially energy subsidy.

Chatib Basri, an economist who is also former finance minister, said that the increase of energy subsidy pushes government to increase debt, which is contrary to government’s focus on fiscal reform. Moreover Indonesia has been awarded the investment grade status by global rating agency Standard & Poor’s (S&P).

Faisal Basri, economist of Indonesia University, urged the government to gain the momentum for keeping fiscal credibility after S&P raised sovereign credit rating in May because the fiscal is focal point in creating instability for the economy since primary balance turns to deficit. He explained, the government’s plan to revise state budget will increase the fiscal risk given the fragile revenue income and the increase of spending.

The investment grade awarded by S&P for Indonesia government bond would actually reduce debt burden as government bond yield is in the declining trend. This opportunity is good for the government as it could refinance debt at cheaper cost. Expecting a widening state budget deficit this year, the government set lower debt interest payment, to Rp219.2 trillion from Rp221.2 trillion although principal debt increased from Rp330.17 trillion to Rp397.24 trillion.

I Made Adi Saputra, analyst for Fixed Income at MNC Securities, worries that this move will affect negative impact as additional government bond will flood to secondary market. He then urges government not to adopt the conventional auction scheme in selling bonds as it will hamper bond prices in secondary market. The government, Saputra said, better chooses the private placement, foreign currency bond, or bilateral and multilateral loan.

“Investors are expecting good yields from the secondary market. If supply is constantly in the primary market then investors may think of buying bonds at auction,” he said.

Governor of Bank Indonesia (BI) Agus Martowardojo said the central bank will monitor the government bond issuance as a result of widening state budget deficit. He believe if the government bond issuance is not too aggressive and have good plan, BI assures that the mitigating of liquidity risk in market will going well. (RF)