Beside deficit in current transaction and inflation, the Government also had to watch on the position of Indonesia’s Debt Service Ratio [DSR] to keep it from widening.
DSR is the total payment of interest plus installment of overseas debt of the long run divided by total export income. The bigger the DSR, the heavier the overseas debt. However, the formulas was not absolutely so because there were countries whose DSR was 40% but did not have any difficulty in their national economy.
On the contrary, it could also happen that a nation had DSR of less than 10% but had to face serious problem in their economy. As long as there was assurance of creditor countries that there was positive economic development in the debitor country, repayment of debt could be predicted to be well fulfilled by the debitor countries.
Indonesia’s debt against GDP had been constantly reduced time after time. In 1998 DSR was posted at 150%, then lowered to 46.5% and o to 30.1% in 2008 although once posting upturn to 31.7% in 2009.
Thankfully again in 2010 posting significant lessening to 28.7%, drifting to the range of 23% in GDP was a reflection of fiscal policy which was efficient and prudent. Normally creditors and rating agencies would appreciate prudent fiscal and monetary policy as it tend to strengthen economic foundation.
Debt-to-export ratio also posted significant downturn from 124.3% in 2015 to 93.5% in 2008 but further up again in 2009 to 121.4% and in 2010 down again to 112.6%. Over the same period, Indonesia’s DSR was seen to fluctuate. In 2005 DSR was posted at 17.3%, further in the following year up to become 25% and down again to 23.1% and by end of 2010 the level was 20.6%.
So far Indonesia’s Debt-to-GDP ratio was still low compared to other ASEAN countries and developing countries. Singapore in 2012 had GDP of 100%, Malaysia 52.5% and Thailand 41.6%.
Furthermore some emerging market countries like Brazil had DSR of 68%, South Africa 38% and India 68%. In Indonesi, all parties must observe growing private debt which drove DSR 2013 to 30.24%.
Although Indonesia’s DSR was considerably safe, all parties must watch on increasing private debt. As long as the debt were used for productive purposes within the debitors’ repaying capacity, and be invested in prospective and profitable projects, then the borrowing would be justifiable.
Expansion of the private sector in Indonesia was understandable as Indonesia was in need of investment in the real sector and infra-structure. This was in tandem with industrialization and industrial downstreaming plans. The two factors encouraged the private sector to make business expansion and the consequences was enormous investment fund needed.
However, the Government and BI should manage Indonesia’s overseas debt to keep it within safe limit, whereas not to endanger the nation’s fundamental economy which had been built up strong. One thing to be watched on was increase of DSR from 34.95% in 2012 to 42.73% in end of 2013.
Weakening of world’s export market through 2013 had caused DSR to grow. In 2014 in line with economic recovery in some European countries, Japan and the USA, the Government of RI was optimistic that national export would post upturn and keep DSR be well maintained at safe level through 2014.
As known, last Thursday [20/2] BI mentioned that Government’s overseas debt dropped from the position of USD 116.1 billion in 2012 to USD 114.2 billion in 2013. Meanwhile the position of non-bank private debt was showing significant upturn from USD 103.2 billion to USD 116.4 billion by end of 2013.
BI’s debt also posted downturn from USD 9.9 billion by end of 2012 to USD 9.2 billion by end of 2013. Increase of debt happened in non-bank private group which increased by USD 23 billion in 2012 to become USD 24 billion by end of 2013.
Although BI rated by percentage ratio of private foreign debt against GDP was still at safe level, essentially it had triggered currency mismatch which endangered national economy. Even today increased private overseas debt was rated as potentially dangerous to national economy. Increase of private overseas debt from 2012 to 2013 was steep, so DSR increased to 54% due to high private overseas debt. The problem was that there was currency mismatch in the private debts.
The currency mismatch today was because the private sector who borrowed money in foreign currency invest in business with rupiah transaction. Today many activities of private business was not export oriented. The forex borrowed did not return in forex.
What was actually happening today in the use of overseas foreign debt was more borrowed money invested in the domestic property and service sector. Investment in property business was a dangerous thing because property credit was on short term basis while overseas debt was on long terms basis. A condition as such might cause maturity mismatch because short term investment was financed by money from long term investment.
Data of BI had it that in quarter 4 of 2013, Indonesia’s DSR had reached 52.7%, consisting of Government’s DSR 4.1% and private DSR 48.6% from payment of overseas debt worth USD 27.9 billion. Investment in the property and service sector was rated as not contributing significantly to national production. So the two sectors having injection of foreign loan did not create any notable added value to economic growth.
Low DSR percentage was no guarantee that the condition of overseas debt was at safe level. In fact DSR never really mattered when the borrowed money was productive. Japan had DSR of 230% but their economy remained steady.
On the other hand, America’s DSR was at safe level, but their economy was trouble by financial crisis due to NPL in subprime mortgage. The problem was that most of US overseas debt was invested in the property sector. In Europe, most of debt was used for subsidy the way the Government of RI did.
Although Indonesia’s overseas debt was at safe level, close collaboration was still needed between the Ministry of Finance, BI and OJK to mitigate problems. The DSR position in quarter IV-2013 at 52.7% was something not to worry about. What must be done was to manage private money to prevent default which would increase Indonesia’s risk.
In the future DSR must serve as reference to evaluate the composition of Government and private debt. The Government debt was clear enough, because it had the reprofiling mechanism and buyback as well as payment schedule. In case of private debt, a deeper insight was necessary to what extent overseas debt would be invested in their business.
Collaboration between the Ministry of Finance, BI and OJK was necessary as many companies that go public needed overseas loan. OJK would be in a position to mitigate effect of company’s debt as they were in possession of company’ data. OJK had date of industry and companies who go public.
Generally speaking, there were some ways to suppress DSR. Firstly, to pay off debt at due date and not to extend it. Secondly, borrowing to be take from domestic creditors, no need to borrow from foreign creditors. Thirdly, even if it was necessary to borrow from abroad, the fund should be invested in productive business yielding forex, because the production was forex oriented and natural hedging would be happening.
Fourthly exporter borrowers who were export oriented must actively make market penetration to overseas markets in order to collect revenues in forex whereby to make payments on time. In this case export must be re-orientated to non-traditional markets like the Middle East, Africa and East Asia. With massive export income, DSR would improve and fundamental economy would be well guarded. (SS)
Business New - March 5, 2014