Urip Hudiono, Jakarta – While the government and central bank need to be on alert against the backdrop of a recent surge in overseas borrowing by the private sector, they should avoid doing anything that might constrain Indonesia's open economy, analysts say.
Aviliani, an economist with the Institute for Development and Finance (Indef) said that while there was a need to establish a monitoring system for the country's foreign debt, the introduction of capital controls would be counterproductive.
"The central bank should regularly publish data on the country's foreign debt position, covering both the public and private sectors, debt repayments, and the interest rates on their debts," she said.
"This would serve as an early warning system, a reminder and a transparent tool for identifying any symptoms that could adversely affect economic growth."
After a meeting Monday with Coordinating Minister for the Economy Boediono and Finance Minister Sri Mulyani Indrawati, Bank Indonesia Governor Burhanuddin Abdullah had warned of a recent trend by the private sector to resort to more offshore borrowing.
If the trend continued, it could overexpose Indonesia to foreign debt, and adversely affect the country's balance of payments, foreign exchange reserves and monetary stability.
BI figures show that the private sector's offshore debt had increased to US$51.1 billion as of the end of last December from $50 billion at the end of September. This compares to a substantial decrease in the country's sovereign foreign debt to $74.1 billion as of the end of December from $83.3 billion at the end of March 2006.
Last week, Indonesia's forex reserves stood at $49.4 billion. However, BI has warned of the potential for an outflow of up to $10 billion due to the short-term nature of recent portfolio investments in the capital markets.
The government and BI has therefore agreed to revive a joint committee to monitor foreign debt levels, Burhanuddin said, adding that there were no plans at the moment to impose capital exchange controls.
Aviliani said that exchange controls would be inappropriate for Indonesia – which has an open economy and free-floating currency – and should be avoided at all costs given the recent market backlash against Thailand after it attempted to restrict capital flows.
She stressed that there was in fact nothing wrong with foreign capital inflows and borrowings as long as they translated into surpluses for the balance of payments through, for example, higher exports.
"The problem arises when foreign debts increase but exports fall, indicating that the borrowed funds have not been put to productive use," she said.
Economist Hadi Soesastro from the Center for Strategic and International Studies (CSIS) was quoted separately by Antara as saying that the government and BI should assess what the private sector was using the increased borrowings for.
This was necessary so as to avoid a repeat of the 1997-1998 Asian financial crisis, when private-sector overseas debt was originally reported to be $10 billion, but later turned out to be $70 billion. With the rupiah having virtually collapsed by then, and the overseas loans having to be repaid in dollars, Indonesia's entire economy was brought to its knees. The country's forex reserves at the time fell to only $21 billion, while the stock of private-sector overseas debt amounted to $130 billion.