Adrian Wail Akhlas, Jakarta – Indonesia's debt has risen significantly this year as the government has ramped up spending to rescue an economy battered by the coronavirus pandemic amid falling state revenue collection.
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, Deputy Finance Minister Suahasil Nazara said on Monday, adding that the debt ratio might reach 37.6 percent by the end of this year.
The debt-to-GDP ratio rose because of a lower interest rate and weakening rupiah exchange rate, as well as the rising issuance of sovereign debt papers (SBNs) to cover financing needs to manage the outbreak as the budget deficit widened, Suahasil told lawmakers.
"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 said.
The government is planning to raise Rp 900.4 trillion (US$61.05 billion) from the government bonds issuance in the second half this year as it allocates Rp 695.2 trillion in stimulus to strengthen the healthcare system and rescue the virus-battered economy despite slow budget absorption. It has also agreed on $40 billion in debt monetization with Bank Indonesia (BI), which would see the central bank buy at least $28 billion worth of government bonds through a private placement this year.
The rising debt has become a concern for several economists as it could potentially lower investors' confidence in the Indonesian economy. Government officials have repeatedly stated that they will prudently manage debt and financing policies.
The government now expects to record a state budget deficit of 6.34 percent of GDP this year and 5.5 percent in 2021. It has pledged to reinstate the budget deficit cap of 3 percent by 2023 in a bid to continue implement a fiscal discipline scheme that has been lauded by investors for a long time.
"[Indonesia's] fiscal deficits were well below the budget ceiling over the past decade, illustrating support for prudent fiscal policy across the political spectrum," Fitch Ratings wrote in its report on Sept. 8, expecting the government's pandemic response would bring the deficit to 6 percent of GDP this year from 2.2 percent in 2019.
Indonesia's slowing economic activity is bad news for state revenue, which fell 13.5 percent year-on-year (yoy) to Rp 1.02 quadrillion 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.
The Indonesian economy shrank 5.32 percent in the second quarter this year and the government expected the economy to shrink further by 2 percent at worst in the third quarter, which will mark the country's first recession since the 1998 Asian financial crisis.
Center of Reform on Economics (CORE) Indonesia research director Piter Abdullah said the government's rising debt was necessary to jack up state spending needed during the current economic downturn, adding the slowing economic activity "will surely hit hard" on state revenue.
"All countries are doing the same thing, the government must inject a huge amount of money to rescue the economy as businesses falter while households cut back on consumption," he told The Jakarta Post on Monday. "The important thing is to ensure the survival of households and businesses by accelerating stimulus disbursement and managing the outbreak."
Bank Mandiri chief economist Andry Asmoro said on Aug. 12 that the government's prudent fiscal policies in recent years had provided room for the authority to deal with the impact of the pandemic.
He expressed optimism that the government's burden sharing agreement with BI would help reduce the country's debt burden and bring down bond yields.