State debt and crisis threats

IO – Respected economists have recent­ly been holding urgent discussions on the actual credibility of the state budget and rising state debt, and the poten­tial crisis that comes along with it.

State Debt reported from 2014-2017:

1. As per August 2017 Rp. 3825.79 T
   As per July 2017 Rp. 3779.98 T
   Increment in 1 single month Rp. 45.81 T
   Or Rp 1.5 T / day

2. As per August 2017 Rp. 3825.79 T
   As per June 2017 Rp. 3706.51 T
   Increment in 2 months Rp. 119.28 T
   Or Rp 2 T / day

3. As per August 2017 Rp. 3825.79 T
   As Per 2014 (October 2014) Rp. 2604.93 T
   Increment in 34 Months Rp. 1220.73 T
   Or Rp 1.2 T / day

We thus conclude that the plan for a Rp 414.7 T 2018 SBN (net) withdrawal tends to be insufficient. My own estimate is that it will reach Rp 545 T (an average Rp 1.5 T per day), with one thing and another; fac­ing reality we see state revenue – especially taxes – really do not reach their stated tar­get, while the problem of budget inefficiency (pruning / leakage) has yet to be resolved. It should logically take place through justi­fiable budget planning and not through the sudden cuts that are often in evidence of late.

Meanwhile, the current ballooning debt burden will sooner or later engulf the ca­pacity of the state budget to meet its obli­gations. Although the ratio of State Debt to GDP currently only reaches 29%, the bare fact of our tax ratio only streaming 10.3% of GDP (2016 figure) signifies debt is an om­inous threat to the ability of authorities to make proper payment of both interest and principal installment sums. Our records re­veal the amount of debt due in 2018 will be Rp 390 T, rising in 2019 to Rp 420 tn for a spectacular total of Rp 810 T. Where will the funds to pay this off come from?

I am aware that the stance of the gov­ernment (through the Ministry of Finance) is that in the case of a sovereign debt of our nation, it should not be related to the tax ratio, considering that the component of the tax ratio in Indonesia is not calculated the same way it is in other countries. The government rather insists on indexing debt ratio to GDP. Even so, the same argument can be raised, in the case of GDP, where the GDP component of each country is different.

In fact, relying on the current tax ratio guidelines, or even a refined tax ratio is at least more relevant to the ability of the State Budget to fulfill its debt payment obligations than GDP, since tax revenue accounts for 86% of total state revenues.

Based on data from the Ministry of Fi­nance as reported in the projected State Budget draft for 2018, the total payment obligations of state debt from January to July 2017 were Rp 347.6 trillion, or 67.56% of the credit allocated in the State Budget. In other words, the amount allocated was Rp 514.57 T, while targeted tax revenue in 2017 amounted to Rp 1473 T. Thus 35% of 2017 tax revenue was consumed in meeting the annual of debt payment obligation, and this percentage is likely to continue to soar, in view of weak tax revenue collection (as it is unlikely to reach its target) while taking out spectacular new loans goes on and on.

Thus, in the preparation of the state budget, the government needs to consider novel criteria, especially in relation to debt, by entering the maximum ratio of debt obli­gations to tax revenues, not indexed to any debt ratio to GDP (still below 30%).

In major advanced countries, whose debt-to-GDP ratio has exceeded 100% (which is often used as a comparison by the government), the average tax rate is above 30%, so the ratio of the state budget to GDP also exceeds a comparable ratio as seen in Indonesia.

Average tax ratio in all nations covered:
High Income 35%
High-middle income 26%
Lower-middle income 19%
Low-income 14.3%

Indonesia is in the lower-middle income countries, whose average tax collection rate is just 19%, while our nation’s tax ratio only reached 10.3% in 2016.

Thus the debt burden is not only insuf­ficient to stack up against the ratio to GDP but more importantly to the liquidity of the state budget and / or its ratio to tax reve­nues actually paid in.

Acceptance of taxation and realization to target.

2013 Rp. 1077 T (93.8%)
2014 Rp. 1147 T (92%)
2015 Rp. 1240 T (83.29%)
2016 Rp. 1285 T (83.48T)
2017 Rp. 1473 T (stated target of the state budget)
2018 Rp. 1609 T APBN

Note:
Target of 2018 tax planning is 9.2% above that of 2017, or 25.2% above 2016 realization.

2016 Realization includes Tax Amnesty.

2017 Target is 15% above the realization of 2016, which in our opinion is
difficult to achieve considering the growth of realized tax revenues from

2013 – 2016 only averaged 7% (Book II, pp. IV.3-2 Bill of State Budget 2018)

There is a tendency in realization of tax revenues that continue to decline, com­pared to the target.

Meanwhile there is the 2018 deficit, marking a Primary Balance Deficit of Rp 78.3 T and a Budget Deficit Rp 325.9 T (2.19% GDP). The deficit ratio of the 2018 state budget draft to taxation receipts is as follows:
Deficit Rp. 325.9 T
Tax Revenues Collected Rp. 1609.3 T
Ratio 20.3%

To avoid a liquidity crisis in the State Budget in fulfilling required state debt obli­gations (interest and principal repayment), the deficit to the tax revenue ratio should not exceed the tax ratio (10.3%). Any defi­cit ratio of the State Budget to tax revenue that exceeds the tax ratio over the medium or long term will lead to a market percep­tions (or one on the part of creditors) that the country might face the risk of default.

Payment of interest on debt (domestic and foreign):
2016 Rp. 182.8 T (100%)
2017 Rp. 218.6 T (120%)
2018 Rp. 247.5 T (135%)

The increased payment of debt inter­est goes far beyond the growth or the in­crease in tax revenues, whereas the source of interest payment on debt should be from such tax revenues, not from the new debt that will enlarge the deficit in a primary balance.

Compare the 2018 Debt Payment of Rp. 247.5 T to projected tax revenues for 2018 (Rp. 1,609.3 T); at 15.4%, this is far above the tax ratio. Moreover, if the target of tax revenue is not achieved, then the ratio will be even greater than 15.4%, not to mention the principal installment of debt that will fall due in 2018, amounting to Rp. 390 tn or 24.2% of 2018 tax revenues (Rp. 1609.3 T), so the payment of interest and debt obliga­tions in 2018 will in fact be 39.6% (15.4% + 24.2%) of tax revenue. Thus only 60.4% remains to be disbursed for economic de­velopment.

As explained above, in 2017 (target), the ratio of debt obligations to the tax revenue is 35%, but in 2018 it will be 39.6% – a sub­stantial increase. It is estimated that the re­alization will be worse (bigger) so that in the next year of the State Budget the estimated ratio will continue to increase (deteriorate).

In our opinion, if this ratio moves into the range of 45% -50%, this will raise a yel­low / red flag in the markets, apart from the Indonesian SBN market. And if there is a crisis in 2018 or 2019 – both political years – which derives from the loss of credibility of our conventional government securities or the difficulty of the state in repayment of the principal debt and interest, we may expect to witness a corruption scandal on the scale of BLBI or Bank Century.

Moreover, the 2018 state budget law incorporates a convenient ‘protection and impunity’ facility against state officials to act to overcome such a crisis. Thus the President and Parliament must be ob­servant and strict in running and overseeing the development of the economy and managing the State Budget.

The argument often raised by the Jokowi regime is that the State Debt is directed to development, especially for in­frastructure, but is this factual? In 2016 the budget deficit (the State Budget) reached Rp 308.3 trillion, while capital expendi­tures were only Rp 169.5 tn or 55% of that figure, which means 45% were non-capital expendi­tures. In the 2015 budget, while the deficit reached Rp 298.5 tril­lion, capital expenditures were only Rp 215.4 tn or 72% – mean­ing 28% was spent on non-capital expenditures.

Thus through the years the greater portion of the budget defi­cit (state debt) was actually used for non-capital expenditures. Compare that with the state budget during the Soeharto government, where capital expenditures were always far greater than the budget deficit, in accordance to GBHN(General Outline of the Na­t i o n ’ s Direction) reference that state debt would only be comple­mentary and temporary. Even dur­ing the SBY administration (for example in 2010), capital expenditures reached 183.8% of the budget deficit.

Another worrying issue in terms of state debt is the debt service-to-export ratio (DSR) which in Indonesia has now reached 40%, while according to the Debt Sustainability Framework a safe ratio is set at 25%. Thus the Indonesian DSR is clearly flashing a red light. Compare this with the DSR of com­parable countries, such as Malaysia, Bang­ladesh, Viet Nam, Thailand, Cambodia, or China, where it is only about 5%. Or Paki­stan, Philippines, Laos, or India, where the DSR is only about 12%.

Thus there are 2 (two) serious threats in terms of state debt, which is the ability of limited state revenues to meet obligations and a DSR which is too steep. State debt has come under a yellow light, moving toward red, signifying the approach of a crisis.

In conclusion, considering the piling on of new debt or the deficit of the State Budget, what needs to be emphasized is the ratio of deficit of the State Budget to tax revenues, that they not exceed a tax ratio, and that the increased percentage of interest payments and debt installment does not exceed the percentage of any tax revenue increase, setting a maximum limitation of interest payment obligations and debt-to-tax rev­enues. In addition, it is also necessary to consider the availability of foreign currency to pay down foreign debt obligations (usu­ally measured by DSR). This new criterion is very necessary so that Indonesia will not get desperately stuck in debt or careen to­wards default, and there still funds left in the State Budget to turn the wheels of the government, and currency stability of the Rupiah against the US dollar.