Failure to pay debts: Beginning of a crisis?

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DR. Fuad Bawazier, MA
Economist and Former Finance Minister in Cabinet Development VII

IO –  In many countries, economic crisis’ begins with failures to pay debt, whether it is government or private debt. In Indonesia, the worry has been that government debt, specifically foreign exchange debt which has experienced a sharp increase, will trigger an economic crisis. Several economists worry the high volume of state-owned enterprise (BUMN) debt will lead the crisis. These worries are understandable when considering that in general the projects funded by debts aren’t carried out economically and are often not very productive afterward. The commotion about PT. Krakatau Steel, Asuransi Jiwasraya, PT. Garuda, and the issue of swelling of construction state-owned enterprise debts alongside the problems with state-owned banks are still under the market’s spotlight. Until now, however, there has yet to be news of a failure of state-owned enterprises to pay debts. 

Unexpectedly, failure to pay debts has instead started in the private sector, specifically the textile industry. PT. DMDT from Duniatex Group which published US$ 300 million in March, 2019 has failed to pay up. It is very strange that bonds only 3-4 months have already failed to be paid upon. This could an indication of fraud. Duniatex Group also took on debt from a syndication of banks including national banks such as Indonesian Eximbank for Rp 17 trillion. What’s even more surprising is when JP Morgan announced that in 2018 Duniatex group had received credit of US$ 362.3 million and Rp 5.25 trillion. The failure to pay debts, albeit being new, is sure to destroy the value of the bonds which will now be marked as junk and like it or not its holders will have to bear the costs. The impact of this failure to pay will not only worry the capital market but also increase the banking Non-Performing Loan (NPL). As a result, credit rating agents will in together tank Duniatex’s credit ratings. If the debt default situation continues, the Rupiah’s exchange rate and stock index will almost certainly collapse, the dollar will disappear from the market, and the price of imported goods will rise drastically. The next to face this could be Indonesia’s credit rating in general, which could also collapse. If that happens, it will be an early signal of an extended economic crisis in Indonesia. 

The hope of the market is that this failure to pay will not be followed by the failure to pay by others in the private sector, and especially not by state-owned enterprises or the government. As if an economic crisis were to happen now, the government is not in a position to help, unlike during the 1998 monetary crisis when the government could help the private sector pay their debts. 

SO, perhaps it is best that we, especially the government be careful, and prepare an umbrella before it rains. Do not assume and especially boast that our economy is strong and when an economic crisis occurs look for a black sheep. There is always a solution as long as one wants to think.