Adrian Wail Akhlas, Jakarta – Indonesia's accumulated debt to fund the COVID-19 fight and falling tax revenue will weaken its "debt affordability" and may deteriorate its credit quality, according to analysts at credit rating agency Moody's Investor Service.
Debt affordability is a means of measurement used by Moody's, calculated by the ratio of annual interest payments required to maintain a government's debt to its annual tax revenues.
Although the deterioration in debt affordability will be modest in general for emerging markets, Indonesia will have interest payments to account for more than 20 percent of government revenue, the agency stated.
"The impact would be quite stark as Indonesia already had weak debt affordability going into this [coronavirus] crisis and that was mainly because of a weak revenue base" and reduction in corporate tax rates, Moody's senior analyst Anushka Shah told an investor call on Wednesday.
"As growth slows and revenue falls on one hand and higher debt levels on the other, debt servicing costs will increase. This will weaken debt affordability."
The coronavirus-induced economic downturn has sapped tax revenue, spurred government spending and necessitated record amounts of government borrowing as the country's budget deficit may widen to 6.34 percent of GDP driven by lower state revenue and higher spending.
Indonesia's state revenue fell by 13.5 percent year-on-year (yoy) to Rp 1.02 quadrillion (US$68.1 billion) as of August, according to Finance Ministry data. The amount is around 60.5 percent of the government's state revenue target totaling Rp 1.69 quadrillion as stated in Presidential Regulation (Perpres) No. 72/2020.
Income from taxes and excise reached Rp 795.95 trillion as of August, while nontax income stood at Rp 232.07 trillion as businesses were hit by weakening demand and lower commodity prices.
Meanwhile, the government is borrowing a record amount of money to fund the Rp 695.2 trillion COVID-19 stimulus package in efforts to rescue the economy, which shrank by 5.32 percent yoy in the second quarter and was widely expected to enter recession in the third quarter.
The government plans to raise Rp 900.4 trillion in the second half this year on top of Rp 430.4 trillion raised through sovereign debt papers in the first half. Moody's gave Indonesia a stable rating outlook for its government bonds, one notch above the lowest investment grade.
The government is also seeking Bank Indonesia's (BI) help to help fund the fiscal deficit and bear the debt burden through a $40 billion "burden-sharing" scheme, which will see the central bank buying at least $28 billion.
Shah said Moody's analysis of the rating implication and credit quality would depend on whether the government was able to "reverse the fiscal and debt deterioration" to precoronavirus levels as well as whether it could use policy buffers effectively.
The deterioration in growth and fiscal dynamics will leave most large emerging market sovereigns, including Indonesia, with higher debt burdens over the next few years.
"We are not expecting a reversion to precoronavirus deficit levels in Indonesia until at least 2025," Shah added.
Indonesia's debt-to-GDP ratio is expected to reach 40 percent by the end of 2021, a significant increase from 29.8 percent by the end of last year, according to Moody's projection.
Finance Minister Sri Mulyani Indrawati previously pledged to reinstate the budget deficit cap of 3 percent by 2023, but the government may seek BI's help in financing its budget deficit through 2022 if needed.
Meanwhile, Deputy Finance Minister Suahasil Nazara said on Sept. 7 that the debt ratio might reach 37.6 percent by the end of this year on the back of a lower interest rate, issuance of sovereign debt papers, as well as a weakening rupiah.
The country's debt-to-gross domestic product (GDP) ratio rose to 34.53 percent as of August, a jump from 29.8 percent recorded in the same month last year."The government expects the debt ratio to reach around 36 percent to 41 percent of GDP next year to fund the country's fiscal deficit," he told lawmakers at the time.