Debt against productivity

57
Bhima Yudhistira Adhinegara
INDEF Researcher

IO – The dogmatic conviction that our national debt is still at a safe level, as it is below 60% of GDP, is today being seriously contested. The Government has repeatedly explained to the public that there is nothing alarming about increasing levels of debt. This explanation is accompanied with a soothing vision of toll roads, bridges, and dams being constructed through debt financing. The mantra, repeated over and over like a record with a stuck needle, is “Owing money for construction of infrastructure is actually a productive debt.”

Thus, anyone who dares to express doubts about the wisdom of loading up with government debt will be accused of being a “provocateurs”, one who disparages national development. This stigma was delivered in an emotional tone by Finance Minister, Sri Mulyani at a recent speech delivered in the offices of the Ministry of Finance at Lapangan Banteng. This is very odd: why would the Government be so easily upset if indeed debts are thought to have worsened, to be reckless or unproductive? Such criticisms should be responded to in a calm, rational manner, and rebutted logically, instead of being responded to as ill-thought words of naysayers.

How should we objectively measure debt risk against productivity, in that case? The simplest method would be to compare debt with GDP. State Finance Law No. 13, Year 2003, states that the maximum allowable limit of State debt is 60% of GDP. Without any fancy qualifications added, the conclusion is that “Even if the Government’s debt as of February 2018 is sitting at Rp 4,034 trillion, it is still equal to just 29.2% of GDP, or far below the 60% limit”.

However, in view of current developments in our finances, such a measurement should be updated: the limit of “debt-to-GDP-ratio” has become too simplistic. We should consider the fact that when European countries suffered from debt crises in 2013-2015, the first point was to doubt the reliability of using the debt-to-GDP ratio as a safe limit. Several European countries with a debt ratio higher than 100%, such as Italy and Belgium, were not in fact included in the IMF’s “Troika” bailout program, while Ireland and Spain, whose 2008 debt ratios were respectively 43% and 39%, were considered by the IMF to be “patients” in need of “rescue”. This does not mean that the debt ratio is irrelevant, but rather that it must be accompanied by other indicators, to avoid any oversimplification of interpretation.

Indonesia is also frequently compared with Japan, in this matter. It is true that Japan has a debt ratio exceeding 200%, but more than 50% of that debt is to the Central Bank of Japan, with a remaining 30% held by Japanese citizens. This means that it was the Japanese people and the Japanese Central Bank who provided loans to their government. Where was the benefit there? When the global economy worsened and triggered a panicked selloff of Government bonds, the Japanese Government was not so concerned: the housewives and small-time employees who bought Government bonds needed only to liquidate them; their money does not go abroad, but rather remains in circulation in the domestic Japanese economy.

The situation of Indonesia is quite different: 38.7% of Government bonds are held by foreign investors. This means that the market for Indonesian Government bonds is highly sensitive to global conditions, such as the rising trend of Fed rate interest rates, geopolitical instability, and any moves toward protectionism in foreign countries. As the financial market is very shallow, the slightest external shock may trigger a run on foreign funds invested in Government bonds. Thus, the fall of the Rupiah to a level of Rp 13,700.00-Rp 13,800.00 per USD 1.00 this March comes as no surprise.

Another indicator that should be considered is the fact that the tax ratio of each country is different. What we need to understand is that debt is not paid down using GDP. Therefore, the debt-to-GDP ratio is actually only a general statistic. The fact is that national debt is paid using tax income, while the tax-to-GDP ratio in Indonesia is only 11%. Don’t even bother comparing with advanced countries – even among ASEAN countries, our tax collection ratio is among the lowest: our closest neighbors, Malaysia and Thailand, have much higher rates at 14.2% and 15.7%, respectively.

If our tax income remains sluggish because the average growth realized within the past 2 years was only 4%, how can we ever hope to repay our debts, plus interest? This is what causes a primary balance deficit: when total State income is deducted with its expenditure, not including payment of debt interest, the result is a negative figure. If such a minus (or deficit) occurs, debts must be paid in installments, or from the issuance of new loans (new debt). Since 2012, the recorded primary balance deficit is Rp 52.7 trillion. In 2017, this figure has increased to Rp 178 trillion. We are robbing Peter to pay Paul, but Peter is really getting desperately short of funds now.

It is clear that Carmen Reinhart and Kenneth Rogoff, two Harvard University professors, have been bullied for daring to warn about debt overhang, i.e., the fact that ever-increasing debts have the potential to stunt economic growth. The cases that Reinhart and Rogoff studied mostly dealt with advanced countries, and thus may be difficult to apply in Indonesia. However, we can at least learn that debts that initially serve as leverage may theoretically (and unexpectedly) loom as a risk that endangers the economy, particularly since the Government jacked up foreign debt to 14% in 2017, while our economic growth rate is actually only 5%. This overly exuberant hope ended up with the embarrassing fall of several modern retailers, as other indicators of weakening public buying power, predicted to continue throughout 2018.

(Bhima Yudhistira Adhinegara)