Burgeoning debts and a depressed rupiah: Indonesia’s economy at its lowest point?

(illustration: IO/Rudraksha)

IO, Jakarta – As we enter the second semester of 2018, Indonesia’s economy continues to stall. The two obvious primary indicators are the nation’s burgeoning debts and a weakening Rupiah exchange rate to the US Dollar. Quo vadis, Indonesia?

Indonesia’s debts continued to increase significantly from 2016 until now. For example, in 2016, State-owned Enterprise debts amounted to Rp 5,819,080,131.00; gross public financial institution debts at Rp 5,891,340,669.00, Government debts at Rp 3,466,960,359.00, and private foreign debts at Rp 1,923,247,778.00. Therefore, Indonesia’s total debt in 2016 was Rp 6,561,250,217.00.

In 2017, total debt was Rp 7,372,047,582.00. State-owned Enterprise debt sat at Rp 6,326,133,523.00, gross public financial institution debt was at Rp 7,516,766,469.00, Government debts was Rp 3,938,453,665.00, and private foreign debts was Rp 2,049,303,917.00. In 2018, Indonesia’s debt records only extend through Quarter I. State-owned Enterprise debt is Rp 6,481,713,533.00, gross public financial institution debt is Rp 8,790,651,087.00, Government debt is Rp 4,136,390.00, and private foreign debt is Rp 2105,802575. Total debt in 2018 is Rp 7,769,429,037.00.

FYI, the above debts was calculated with a Rupiah exchange rate against US Dollar at Rp 13,500.00. However, the current exchange rate is Rp 14,300.00-Rp 14,400.00. This means that Indonesia’s debt continues to burgeon.

Not only does our debt skyrocket, the ever-strengthening position of the US Dollar is a concern for Indonesia’s current economy. When President Jokowi was appointed in October 2014, the Rupiah exchange rate to US Dollar was Rp 12,050.00. Four years later, the Rupiah continues to falter. Referring to the Jakarta Interbank Spot Dollar Rate (Jisdor) reference exchange rate, Rupiah exchange rate was Rp 14,343.00 on Wednesday (4/7/2018). If we see the condition within the past few days, escalation of the Rupiah’s weakening has been felt since Friday (29/6/2018), when it fell to Rp 14,404.00. on Thursday (28/6/2018), Rupiah strengthened to Rp 14,271.00. In fact, the Rupiah exchange rate hit the worst point in 2018 on Tuesday (3/7/2018), i.e. at Rp 14,418.00 per US Dollar or nearly Rp 14,500.00.

The Main Cause of Rupiah Decline
In his interview with the Independent Observer, economic observer Fuad Bawazier said that he has warned many times that Rupiah will tend to weaken throughout 2018. Rupiah will only strengthen temporarily if interest rates are increased, when the US Dollar happens to be weak due to some factor unrelated to Indonesia’s economy, because Bank Indonesia intervenes with the capital market, etc. However, all of these “Viagras” do not come without a risk.

Increasing interest rates will burden our economy and make it harder for our country to compete with other countries. Foreign currency intervention will eat into our continuously draining reserves. The main cause of Rupiah weakening is that Dollar income to Indonesia’s economy is smaller than Dollar demand or need. In economic terms, core cause of the weakening of Rupiah is the supply or entry of USD into Indonesia’s economy is much smaller than USD demand or need. Indonesia’s current transaction deficit this year is estimated at USD 25 billion. In other words, we spend many more Dollars than what we earn. This deficit is what cause Rupiah to weaken against the USD. Current transaction deficit occurs because our Trade Balance is at a deficit (minus exports, increased imports of merchandise). The Service Transaction Balance is also deficit.

The Government then increased Rupiah interest rates to keep the Rupiah from falling even further. Consequently, our economy becomes uncompetitive, because the Government then intervenes on the foreign exchange market, which then depletes currency reserves. Current transaction deficit can be resolved by increasing exports and reducing imports and bringing in investments. Government tries to cover this foreign currency deficit in many ways, such as attracting foreign currency debts or other types of hot money. This is not a healthy way, and it even might cause us to fall even deeper. Weak economic fundamentals are followed with State Budget deficits. The Indonesian economy is deficit in practically all directions.

According to Farial Anwar, financial market observer, currencies sold at the market move due to one of three factors. First, according to economic fundamentals, i.e. growth rates, export-import ratios, inflation rate, etc. If they’re good, the currency will strengthen; if bad, it will weaken. Secondly, technical or trading impact. Third and most worrisome, market sentiment as it awakens from the perceptions, views, analysis, and information from higher-ups in the relevant sectors, such as monetary and fiscal officials and analysts (currency trader).

“Rupiah might actually weaken, but I don’t dare to state an exact figure because it will cause negative public perceptions. Our Rupiah is actually at a dire level – and it can still fall even further, because US Dollar interest rates increased from 0.25% to their current position of 1.75%-2%. Dollar is strong against all other currencies, because para speculators who play the financial market have fled emerging markets to enter America and get Dollars, because their income will increase if Dollar rises,” Farial Anwar said.

Currently, holding onto Dollars is most profitable, because it is actually on the rise. Especially since the Fed interest rates is still rising, and this is expected to continue all through this year and may even go on next year. The interest rate increases 0.25% base points each time, and it is expected to rise again 3 times, or even several times more in the next year. In the worst case, the Dollar interest rate may get to above 2.5% or even above 3% in the long term. Rupiah will continue to weaken if we cannot control this condition. This is because other than interest rate hikes, America is currently locked in a trade war with other countries such as China, Canada, and European countries that set extremely high tariffs.

The increase of US Dollar interest rates and trade wars are external factors. The internal factors that cause Rupiah to weaken concern a capital outflow from our capital market. Foreign hot money is leaving our capital market because they are more interested in holding on to Dollars as there is a tendency for Dollar value to increase). The Composite Index has even dropped from 5,000 to 6,500. “Foreign parties sell their stocks to get Rupiah and use that Rupiah to buy Dollars. Our Government Bonds are also sold off everywhere in order to get Dollars. Therefore, Dollar demand is extremely large. Even though Indonesia’s economic growth is still relatively higher than 5% and inflation rate is still controlled at 3.5 ±1%, our Trade Balance is still in deficit,” Farial Anwar said.

Trade Balance is the result of exports and imports, and currently Dollar demand far outstrips Dollar supply, pressuring the Rupiah for quite some time. Dollar supply now relies on the State’s foreign currency reserves from Bank Indonesia as Dollar demand is very high and only a few parties want to sell Dollars.

Riza Annisa, INDEF researcher, said that both domestic and foreign factors work together to weaken the Rupiah. External factors are mostly related to America’s constantly improving economy, while with the current condition of Indonesia’s economy, domestic factors do not help at all. This is worsened as our exports are actually negative. “This affects exchange rate, and worse, our products’ competitiveness,” she said.

Near Impossibility of Raising Rupiah
Farial Anwar admits that it is very difficult to strengthen the Rupiah. Bank Indonesia has already issued several policies to attempt to strengthen the Rupiah. First, it intervenes by using foreign currency reserves, which causes a steep drop in foreign currency reserves. Second, it intervenes with Government Bonds. When many people sell Government Bonds, BI buys them to keep their prices from falling too deeply. Third, BI raised interest rates for the third time in this Quarter from 4.25% to 5.25%. This is done with the hope that the people would be interested in holding Rupiah because interest gets higher, but so far there is little response. “Therefore, Rupiah is still under pressure even though interest rates have increased 1% within the past 2 months,” he said.

In order to strengthen Rupiah, BI usually tries hedging. However, this causes an even further drop in foreign currency reserves. Farial Anwar urges foreign currency reserves to be protected, because their main purpose is to repay Government foreign debts, both the principal and the interest. Furthermore, Government imports such as oil imports etc., must be maintained for at least 4-6 months, so foreign currency reserves cannot be completely used for intervention when Rupiah falls.

“I have suggested that the Government consider foreign currency control for a long time. I mean, foreign funds from capital market or bonds are regulated. Any new foreign fund must stay for at least 1-2 months, for example. Don’t sell it soon after you buy it; don’t let foreign funds go in and out of the country freely. However, the Government does not dare to amend the Free Foreign Exchange Law yet. Exporters easily park their dollars abroad, and the ones enjoying the foreign currencies gathered from our exports and imports are Hong Kong, Singapore, China, and Taiwan. They do their business in Indonesia, but they put their dollars abroad because they feel it’s safer there. This is why it is worrisome for me that the Government allows the result of our export foreign currencies to leave the country, while Indonesia is desperately needing dollars. Finally, there has been an intervention from BI foreign currency reserves. The current regulation only stipulates that domestic banks are used for exports, but there is no stipulation about how long they must remain here. We are concerned that it is other countries that enjoy our dollars, while we’re the ones who earned them from our exports. Foreigners benefit when Rupiah is unstable,” Farial Anwar said.

Our neighboring countries, Farial Anwar said, have something called the “holding period”. Therefore, if a foreign fund comes in from the buying of bonds or shares, such funds must remain in the country for a specific period of time, from 1-3 months. They cannot be resold immediately after being bought. It is regulated and controlled.

The question is, “How long can we stand Rupiah being pressured like this?” Especially since nowadays, internal politics are full of uncertainty. Will the new government have the same policy, or will they change? Foreign investors would definitely wait on new government policies in the economy etc. that can pull back investors, both in the real sector and in the financial market sector. The weakening of the Rupiah strongly affects domestic prices of goods, because Indonesia has extremely large imports. Industries such as medicine and oil make use of imported materials, and the costs have risen. Finally, it is the people who have to deal with it, because fuel prices increase.

To control Rupiah exchange rate against US Dollar, Riza Annisa suggested that the Government can use at least three monetary instruments. First, Open Market Operations. Second, reference interest rates. Third, reserve requirement. The movements per 31 March, 30 April, and 31 May 2018 show that the Government performed Open Market Operations.

Debt Liabilities
Fahrian Anwar said that along with the weakening of the Rupiah, foreign debt liabilities increase because debts are created in Dollars. State-owned Enterprise debts, Government debts, and private debts also continue to increase. Now, the Government has the obligation to pay even bigger principal and interest as they mature. How much tax income is wasted just to cover the added liability due to the weakening of the Rupiah? The people ended up being shortchanged, because the taxes that they pay are being used to repay debts due to increased liability, while tax money should have been used to provide public facilities.

“The State Budget this year assumes that the exchange rate will be Rp 13,400.00. However, the current Rupiah exchange rate is Rp 14,300, meaning that none of the remaining assumptions is usable. This is the problem, and we all wonder if the potential pressure will continue down to the end of the year. Just wait and see,” Fahrial Anwar said.

“We do have a lot of debt,” Fuad Bawazier said, “Government, State-owned Enterprise, and private debts. Any problem in the payment process will be borne by the Government. Therefore, the State Budget can be stuck if no new debts are made. The Government thus constantly takes on new debts in order to keep its wheels running.

In view of the situation, Government Bonds should not be recorded as debts, but as contingent liability. In other words, if State-owned Enterprises fail to repay, the Government will be responsible for repayment using State Budget, because it is the primary shareholder. However, private debts are not the Government’s responsibility. The total amount of contingent debts is Rp 2,000 trillion in State-owned Enterprise debts.

Indonesia’s debt has two categories: debt between our Government and another Government; and debts to International Agencies. The top 6 creditor countries for Indonesia are: Japan, France, Germany, South Korea, China, and the United States. Loans from America and Japan have continued to decrease from 2014 until now. For example, Japan loaned us up to Rp 212 trillion in 2014. In 2017, the loan is about Rp 191 trillion. American loans in 2014 was Rp 13 trillion, while in 2017 there is only Rp 8 trillion. On the contrary, loans from China continues to increase: Chinese loans in 2014 was Rp 11 trillion, and in 2017 it was 14 trillion.

Indonesia’s top international agency creditors include the World Bank, Asian Development Bank (ADB), Islamic Development Bank (IDB), International Fund for Agricultural Development (IFAD), European Investment Bank (EIB), Nordic Investment Bank (NIB), and Asian Infrastructure Investment Bank (AIIB). The World Bank is the absolute biggest creditor, by lending us Rp 241 trillion in 2017.

For this year until 2019, the Government must pay Rp 810 trillion of mature debts. Fuad Bawazier states that it is safer for us to borrow from international agencies, because they have a longer tenure of 10-20 years at a lower interest rate. Furthermore, loans from international agencies are generally really used for development projects. On the other hand, borrowing from other countries means a shorter tenure (usually 5-7 years) and harsh interest rates and strict stipulations (for example, asset seizure when we fail to pay.

Riza Annisa said that there are pluses and minuses for loans from government-to-government, in comparison with loans from international agencies. However, like Fuad Bawazier, she suggested that it would be better for the Government to get loans from international agencies. This is because agency loans are generally used for development, and the agency will be monitoring their use. “So, we can explain to them that the money will be used to construct this and that facility, they will be complete in x years, that is clearer and more focused,” she said.

The Government’s Lack of Ideas
Economist Rizal Ramli sharply criticizes our mounting debt. He believes that there are actually innovative ways to reduce debt. Unfortunately, the current Government does not have the ability to manage its debt innovatively. The primary key here is economic growth. If the economy can grow twice the way it is now, the capacity to repay debts is bigger and debt ratio would also be better. However, the Government continued to increase Bank Indonesia interest rates, and disciplined its budget badly by budget cutdowns and tax chasing. This causes our economic growth to remain stagnant at 5%.

Even if Bank Indonesia aggressively increased interest rates to ¼% or ½%, it would not be of much use. Rizal Ramli concludes that the total interest rate hike should be 3%-4% until the end of the year. But if they do that, credit growth will fall back to below 8%. Non-performing and default loans will be bigger, and finally, economic growth will fall to about 4.5% instead of increasing to 5.4% this year.

Indonesia’s economic recovery cannot go anywhere. With BI’s increased interest rates, economic growth will decrease, non-performing credit will grow, and buying power will decrease. If interest rates are not increased, Rupiah will fall to the level of Rp 15,000.00/USD. This is because the fundamentals of our economy are shaky: the Government’s targeted growth rates are never achieved. Three years ago, Rizal Ramli predicts that economic growth in 2016/2017 will only be 5%. Nobody believed him at the time, but now this is how it happens. This is because our Government only attempts to tighten or cut the budget and chase taxes, so economic growth cannot get higher.

Developed countries in Southeast Asia have grown 12% within the past 25 years, because they do not comply with IMF and World Bank requirements, and they don’t rely on debts. Japan grew 12% within 20 years after the end of World War II. China also grew 12% within the past 25 years because their debts are mostly domestic ones. This is the fact, even though in 1967 the income rate of all Asiatic countries is relatively similar, at USD 100.00 per person per annum. In fact, China was poorer than Indonesia with an income rate of USD 50.00 per person per annum. Yet now, Korea’s income is USD 10,000.00 per person per annum, or 10 times Indonesia’s earnings. Malaysia’s earnings are 3 times that of Indonesia, Taiwan’s 6 times. There are two main causes for this: corruption, and an economic policy that complies with the World Bank and IMF.

“The Minister of Finance claims that the ratio of Indonesia’s debt to the GDP is lower than that in Italy and India. Another official states that Indonesia’s debt ratio is lower than that of America. That’s absolute rubbish! America is the only country that can print out their dollars and sell them freely abroad, with printing costs at only USD 2.00 per USD 100.00. That’s because America is a super power. Don’t even think of comparing ourselves to Japan by saying that Indonesia’s debt ratio is lower than that of Japan! Japan’s government debts are 80% from domestic parties, so that even if there are external or global shocks, the impact will be small. This is absolutely unlike Indonesia, who has 60% of its debts from foreign countries,” Rizal Ramli said.

These comparisons are used selectively in order to obscure the issue and make it seem as if we are having no problems. The indicator Indonesia uses is the debt payment ratio to the GDP. Rizal Ramli said that this is exactly the ratio most rarely used throughout the world, even during the rule of Soeharto and Gus Dur. The most commonly used indicator throughout the world is the debt service ratio, which is the ratio between debt repayment and exports.

“Our exports are in dollars, and our debt service ratio is 35% – the highest in Southeast Asia. The normal rate during Pak Harto and Gus Dur eras were 20%. Now that’s OK. More than that will not be prudent. Here we have a Financial Minister who keeps on parroting, “We are prudent, we are prudent.” Then when we compare ourselves to other emerging markets, the foreign ownership rate of our shares and bonds in the market is the highest in comparison with other countries. This means that our country is extremely sensitive to international volatility,” Rizal Ramli said. “Furthermore, we also have a negative Trade Balance at USD 1.6 billion in April, and at USD 1.5 billion. Current Transactions are minus USD 5.5 billion. Primary Income Balance is minus USD 7.9 billion.”

Rizal Ramli said that there is an innovative way for resolving the increase of Indonesia’s debt. When he became the Coordinating Minister of the Economy in the Gus Dur era in 2000, one of his policies was to include all real estate companies as clients for the Indonesian Bank Restructuring Agency (Badan Penyehatan Perbankan Nasional – “BPPN”), then the companies’ debts got restructured.

“Because real estate is the indicator of all other economic sectors. When real estate rises, other businesses also rise. As a result, Indonesia’s economy at the time grew 7.5%. Usually, debts increase as the economy grows, Gus Dur’s was our only government when we have economic growth, with a debt reduction to minus USD 4.5 billion. So, what we do is simple, we do debt management innovations by a nature swap with Germany. German is well-known for its attention to environmental issues. The Government offers hundreds of hectares of land in Kalimantan to German to conserve. They agreed to swap hundreds of millions of US Dollars of Indonesia’s debts with forest conservation,” he said.

In 2001, Rizal Ramli also arranged another “debt for nature” swap scheme with Kuwait. He swapped high-interest debts with low-interest ones. Kuwait even added the gift of free construction of the Pasopati flyover road in Bandung. “Changing Indonesia does not mean that we need to use money all the time,” he said. “It’s policies that matter – money will come in automatically. That’s what Japan and China do by altering their policies.”

Fuad Bawazier considers that the sharply and consistently increasing foreign currency debts of both the Government (including State-owned companies) and private parties start to make the creditors uneasy. Indonesia might be in trouble to, or might even be unable to, repay its debts. On the other hand, the market also notices the dependence of Indonesia’s economy on imported goods, especially food and energy, which in the end will need foreign currencies.

With burgeoning debts and a continued fall of the Rupiah, Fuad Bawazier considers that the “economic independence” promised by Jokowi’s Government, is merely sweet nothings. “Especially since the Government is aggressively issuing various “populist” policies in order to win the 2019 Elections. The State Budget is wasted just to gain national and international popularity. Extravagant events such as hosting the annual IMF-World Bank Convention needs to be stopped, or at least delayed. However, that’s rather unlikely! That’s the fun in being an incumbent I suppose – he can campaign legally using the State’s funds, leaving the future Government and the next generation to deal with the consequences,” he said. (dessy/ekawati)