Overdrawn Nation

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

IO – I find it very difficult to accept the lies repeatedly stated by official economists:

  1. Indonesia’s economic fundamentals is strong;
  2. Indonesia’s economy is healthy and on the right track; and
  3. Indonesia is soon to be world economic giant;

While in fact Indonesia’s economics is overdrawn alias deficit in many of the important economic and financial sectors. No household is healthy when everything is overdrawn or deficit, especially if the bad situation continues for a long time. Sooner or later, economic crisis or even a crash will occur despite constant denial by the economists in power.

Current Transactions in 2018 is estimated to have a deficit of USD 23 billion-USD 25 billion, or  overdrawn at about Rp 326 trillion-Rp 355 trillion (per USD exchange rate of Rp 14,200.00). Detailed foreign currency income and expenditure transactions can be seen from the Trade Balance (difference between exports and imports), which is overdrawn by USD 1.6 billion in April 2018, while the overdrawn amount in the December 2017 to March 2018 period is USD 1.1 billion. The Service Flow Balance until April 2018 is overdrawn by USD 1.4 billion, and the Petroleum and Gas Trade Balance is overdrawn by USD 2.4 billion.

The overdrawn of International Balance (foreign currency transactions) in the first quarter of 2018 is expected to continue to weaken until the end of the year. What excuses then will be trotted out to say that the Rupiah exchange rate has not weakened, if the reserves or other healthy sources of foreign currency have been decreasing? Foreign currency reserve sources are said to be “healthy” when they are generated by foreign trade of goods and services and foreign direct investment, not from debts or “hot money”.

As it happens, the USD is in strong position, so that those in power can say that the current drop of Rupiah exchange rate is caused only by global or external factors. The truth is, our economy is vulnerable because of Current Transactions deficit and bad fundamental conditions. The slightest bit of global pressure would immediately shake Indonesia’s unhealthy economy. BI’s USD 8 billion intervention to Rupiah exchange rate might be hoped to help maintain exchange rate, but Rupiah continues to fall to Rp 14,200.00/USD. This means that Rupiah’s depreciation since the start of the year is close to 5%, and foreign exchange reserves has dropped from USD 132 billion at the end of the year to the current amount of USD 124.9 billion. I cannot imagine how low Rupiah exchange rate would be if BI (Central Bank) had not intervened.

This fall in the Rupiah exchange rate would sooner or later cause imported inflation, as Indonesians are intimately bound with imported goods in their daily lives, such as gadgets (cellphones and computers), wheat (primary ingredient for noodles, biscuits, and bread), and soy as the primary ingredient for tofu and tempe. Aggregate inflation is still under control, but the price of daily necessities have exceeded the aggregate inflation rate.

Indonesia is also overdrawn in petroleum fuel, as our daily oil consumption is 1.6 million barrels, while we produce at most 800,000 barrels a day, or only producing 50% of our needs. The oil prices set in the State Budget is USD 48.00 a barrel, but now it is already over USD 70.00 a barrel, inching closer to USD 80.00 per. Not only have prices increased, but exchange rates have also decreased from the predicted Rp 13,400.00 to Rp 14,200.00, or an overdrawn or depreciation of 6%. This is a double hit.

At a daily oil import rate of 800,000 barrels and a market price of USD 70 per barrel, the extra money required by the State Budget is (USD 70.00 – USD 48) X 800,000 = USD 17.6j million a day. At an exchange rate of Rp 14,000.00, that equals Rp 246 billion a day.  As the State Budget is already on a deficit, the required additional subsidies must be obtained through new debts. The addition of petroleum fuel subsidy in the State Budget is no small change at Rp 500 per liter of diesel fuel, which is a raise made to finance the 13th month Salary scheme. This is like a hidden campaign implemented using the State’s money, but still within legal limits. That’s the nice thing about being the incumbent.

All this time, Jokowi and those economists in power pride themselves on being able to ride with market price mechanism instead of subsidizing petroleum fuel for lower prices, a move claimed to be merely burning State Budget money on the road and enjoyed by unworthy parties (reaching the wrong target). Now, Jokowi must choose whether he is going to be consistent and consequent with his preference of following market prices, or going back to increasing petroleum fuel subsidies in order to keep prices from rising? Remember that this is the political year, the year of image building, and he would be seeking votes.

The 2018 State Budget is expected to be deficit at Rp 326 trillion, which must be covered with even more debts. The amount of State debts maturing in 2018 is Rp 390 trillion, and it can only increase in 2019. That’s not including the interest to be paid on those debts, which in 2018 amounts to Rp 250 trillion. So for 2018, the Government must get ready to pay maturing debts and their interest at Rp 640 trillion, or 40%-45% of tax income. Naturally, the remaining 55%-60% available in the Budget will not be sufficient to cover other Budget items.

I personally believe that in practice, the portion used to repay debts and interest will be closer to 45%, in view of the following:

  1. Weakened Rupiah exchange rate, while part of the debt is in foreign currency;
  2. The need to increase the yield of Indonesian Government Bonds, in order to win funding from the market; and
  3. Extra State Budget expenditures in this political year for image building or gaining the people’s vote, for example the Rp 36 trillion spent on 13th salary and Religious Holiday Allowance for ASN and retirees, and fuel and electricity subsidies made in order to keep prices from rising.

Meanwhile, Indonesia’s foreign debts at the end of January 2018 has already reached USD 357.5 billion or Rp 4,916 trillion (Rupiah exchange rate as published by BI). But if we use the current Rupiah exchange rate at around Rp 14,200.00, foreign debts increased to Rp 5,076 trillion or an increase of Rp 160 trillion. At the start of his rule (Oct 2014), Jokowi inherited State Debts at Rp 2604 trillion. By the end of March 2018, this amount increased to Rp 4,136 trillion. That’s an increase of Rp 1532 tirllion within 41 months, or Rp 37 trillion a month, or Rp 1.25 trillion a day. This is not including State Budget debts.

This year, the Government is issuing new Government Bonds at Rp 846.4 trillion. Rp 119 trillion of this amount is used to cover maturing Treasury Securities (Surat Perbendaharaan Negara – “SPN”). Furthermore, there are new multilateral and bilateral debts in 2018 at Rp 55.8 trillion. So the total of new debts (which will be partially used to cover old debts) this year is Rp 902.2 trillion, or an  increase of 14%.

Debts continue to skyrocket, but national targets are not achieved. Rice independence is still far off the mark, as this year the Government has already signed rice import contracts for 1 million tons and might agree to import another 500,000 tons. Food security? That’s even worse, as in 2017 just wheat imports reached 11.5 million tons. Imagine if there are no wheat imports, as it has practically replaced rice as Indonesia’s primary foodstuff, how terrible starvation in our homeland would be.

On the other hand, the Government has always prided itself because Indonesia has been included in the G20 country due to its GDP. However, this is due solely to the fact that Indonesia’s population is the 4th numerous country in the world. When we view real value – and that is the more important measurement – Indonesia’s per capita income is only 116th in the world.  We are actually still poor.

The Government need to stop using the argument based on Law No. 17/2003, which states that the State’s debt is limited to 60% of GDP and State Budget deficit is limited at 3% of GDP. Realistically, the debt limit measurement we all should use is our actual ability to repay them. So in the future, let the Government itself compare the RATIO of Indonesian citizens’ per capita debt against the per capita income among ASEAN and Asia Pacific countries, preferably in the global level, so that the public is aware of its own ranking.