Adrian Wail Akhlas, Jakarta – Indonesia's debt will swell significantly next year as the government increases spending to help the country recover from the COVID-19 pandemic, an official has said.
The Finance Ministry's Fiscal Policy Agency head Febrio Nathan Kacaribu said that Indonesia's debt-to-gross domestic product (GDP) ratio would swell to between 33.8 percent and 35.8 percent next year, up from 29.8 percent at the end of last year, to cover a widening budget deficit during the pandemic.
"This is a direct consequence of a countercyclical policy to support economic recovery and strengthen economic fundamentals in 2020 and 2021," Febrio said at a discussion on Wednesday. "We will continue to look at various financing sources to maintain the health of the debt ratio."
The government expects the budget deficit to reach 6.34 percent of GDP this year to cover a Rp 695.2 trillion (US$49.23 billion) stimulus package. In 2021, the government expects the budget deficit to hover between 3.05 percent and 4.01 percent.
The government is planning to issue another Rp 990 trillion worth of government bonds from June to December this year to finance the widening deficit. It had sold Rp 369 trillion worth of government bonds as of May, an increase of 98.3 percent from the same period last year. Next year's state budget figures are still under discussion.
"The government realizes that fiscal discipline is crucial to speed up economic recovery," Febrio added. "We expect the budget deficit will be able to return below 3 percent in 2022."
The government has relaxed the state budget deficit ceiling of 3 percent of GDP, a cap introduced after the 1998 Asian financial crisis, which has never before been exceeded. The government has chosen to exceed the limit to fight the health, social and economic impacts of the pandemic.
However, the law that has allowed the government to circumvent the ceiling stipulates that the government must reinstate the 3 percent cap by 2023.
"Our fiscal policy for next year is speeding up economic recovery and strengthening sectoral reforms to prevent us from falling into the middle-income trap," Febrio said.
The government expects the economy to grow between 4.5 percent and 5.5 percent in 2021 and projects this year's growth will hover between 2.3 percent and negative 0.4 percent. Finance Minister Sri Mulyani Indrawati, however, said this year's growth looked more likely to be within the range of zero to 1 percent as the second-quarter economy was projected to shrink by 3.1 percent.
Indonesia booked its lowest GDP growth in 19 years in the first quarter: 2.97 percent. The coronavirus outbreak forced people to stay at home, disrupting business and economic activity.
Fitch Ratings director for sovereigns and supranationals Thomas Rookmaker expected Indonesia's government debt ratio to swell to 38 percent by the end of the year, adding that it would still be below the BBB rating peer median of 53 percent of GDP.
"A rapid increase in public debt resulting from rising budget deficits is a negative rating sensibility from our last review when we affirmed Indonesia's rating at BBB with a stable outlook, but that was before the coronavirus pandemic," Rookmaker told The Jakarta Post on Wednesday.
The key question from a ratings perspective is how the government will use the fiscal space and what impact it will have on Indonesia's medium-term public finances, he said.
"Indonesia has a policy record of fiscal prudence supported by the political spectrum. This gives credibility to the authorities to return public finance back to their pre-crisis track and could be supportive of the rating," Rookmaker stated.
World Bank senior economist for Indonesia Ralph van Doorn said last month that the country's debt would rise to 37 percent of GDP this year, driven by an increase in borrowing to cover for the widening budget deficit and to cope with the economic slowdown and rupiah exchange rate depreciation.
"Indonesia must maintain its hard-earned market confidence, which can be lost very easily, as credit rating agencies have signaled concerns [about debts] in the medium term," Van Doorn said.
"It must reinstate the deficit ceiling and end Bank Indonesia's partial financing of the deficit" after the virus threat subsides, he added.