Get ready for a (possible) economic crisis in 2019

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

IO – The Government’s debts within the 3 (three) years of Jokowi’s rule increased more than Rp 1200 trillion, far exceeding the increase of the currently stagnant tax revenue that usually serves as an indicator of the ability to repay debts. The Government always reasons that the Rp 4,000 trillion plus national debt, or nearing 30% of GDP, is still far below the maximum limit of ratio to GDP stipulated by Law No. 17 year 2003 the State’s Finance at 60% PDB, and far below the ratio of debts in other countries.

The Government frequently cites Japan as comparison, as it has a debt-to-GDP ratio of far higher than 200%. However, Japan has several unique characteristics as follows:

  1. It is indebted only to its own people and to the Central Bank of Japan, at a ratio of about 50% each.
  2. The debt is in its own currency (Yen).
  3. The interest rate is extremely low, only a bit higher than 1%. Compare this with the interest of Indonesia’s debts, which is the highest in the Asia-Pacific region.
  4. Japan’s credit rating is A+ or extremely secure, while Indonesia’s credit rating is BBB or just secure.
  5. Even though Japan has a high debt level, but its real economy is supported by net international investment positions at USD 2.8 trillion, which means that it has a positive net external asset or a creditor nation. Indonesia, however, has a negative net international investment position exceeding USD 400 billion. In other words, it has net external liabilities, or it is a country that really has the balance as a debtor country.

The Government does not compare Japan’s tax ratio at 31% GDP with Indonesia’s tax ratio at less than 11%, or practically the lowest rate in the world. The Government also does not compare the ratio of the State Budget to GDP in Indonesia, which is very low in comparison with the same ratio in other countries frequently cited as comparison. The debt service ratio in Indonesia at 40% is the highest in Southeast Asia, while the maximum safe limit is 25%. Furthermore, about 41% of the State’s debts are expressed in foreign currencies. With an average time to maturity of 9 (nine) years and about 40% have a tenor or maturity within the next 5 (five) years, the State Budget will be much strained within those years.

Another concern is the ballooning of Government debts because Rupiah tends to weaken and has reached the level of Rp 14,200.00 USD, thus necessitating even more money from tax revenue in order to cover the payment of the debts in foreign currency. A further concern is the limited amount of foreign currency reserve available for repaying debts, in view of the following 5 reasons:

  1. Trade balance tends to be deficit within the past 3 months (December 2017 to February 2018), at a total of USD 1.1 billion, or an average monthly deficit of USD 364 million. In other words, the trade balance deficit in Quarter I of 2018 reached USD 1.6 billion.
  2. Current increase in foreign currency reserves originate from foreign debts and hot money, which means that it can be withdrawn back to its original country at any time. This is already proven, as throughout May 2018 net selling by foreign investors occur at IDX of up to Rp 7 trillion.
  3. Tax ratio is low and tends to continue decreasing, indicating similarly lower ability of the Government to repay its debts in the future.
  4. The industrial sector, which is the biggest contributor to tax revenue at 31% tends to shrink due to de-industrialization, i.e. from 28% of GDP in 1997 to 20% of GDP in 2017.
  5. The increase of 2018 budget for subsidies on things such as electricity and petroleum fuel, is an extra burden to the State Budget. This is because President Jokowi wants to maintain the people’s political support for the 2019 Presidential Elections, so he would rather increase subsidies than raise prices.
  6. Indonesia’s foreign debts per end of April 2018 has reached USD 387.5 billion or Rp 5,425 T (Rp 14,000.00 exchange rate).

On the other hand, nearly all of the Government’s financial and economic targets are unachieved.  The above reasons, especially liquidity problems relating to the State Budget, are believed to have affected the trust of investors in the National Government Bonds (Surat Utang Negara – “SUN”). This is indicated by the low sales of SUN on the second week of May: of the SUN offered at Rp 17 T, only Rp 7.17 T of it is sold.

When viewed from the various variables relating to the ability to repay the principal debts as well as the interest, the Government’s debts are at a worrisome level. With sub-par economic growth and low trade, even private entrepreneurs start to have difficulties in repaying their debts. Non-performing credit in banks tend to increase, and loan restructurings also increase in order to reduce the amount of loans with non-performing status.

As this is compiled from various scientific studies and the critiques of economists, the Government does not need to get irritated, let alone call this a provocation. More importantly, the Government must be honest in submitting the State’s financial reports and use formal and official standards. We should recall that the great economic crisis in 1997 started with the market’s fear that Indonesia’s private entrepreneurs will be hard up to repay their debts, especially their foreign currency debts.

This fear ironically started the weakening of the Rupiah exchange rate, as the State’s financial condition in 1997 was excellent and macro-economic indicators, which include economic growth, inflation, surplus trade balance, and sufficient foreign currency reserve, are generally good. In fact, at the time, the Government reiterates that Indonesia’s fundamental condition at the time was very strong. However, the issue faced by the creditor is a different one: will the debtor be able to repay its debts? This is a unique micro issue that is not always directly related to the indications of macro-economy.  This is the issue that caused the sudden occurrence of the debt-based crisis, and Indonesia really panicked.

Therefore, we – especially the Government – should not treat debt issues lightly. We should also not consider that criticizing economists don’t know what is going on, or that the economists are only being smart-alecks. Sooner or later, the market will realize that the Government will undergo difficulties in repaying its debts, and that is how crises start. As we have experienced in Indonesia and in other countries in 1997, economic crises usually occur because there are more debts than what the State can repay, and this is preceded by a weakening of the country’s currency exchange value. These indications have all been seen in Indonesia, so beware.