TO WATCH OVERSEAS DEBT OF THE PRIVATE SECTOR

Amidst still strong pressures on Rupiah, it was recommendable for the government to watch on the development of overseas debt of the private sector. The problem was that if the upjump of private debt was not monitored, observed and controlled, it might hide some sort of time bomb for the future.

               

At least there were two serious issues to be anticipated. Firstly, the absolute amount of overseas debt of the private sector. Secondly, due date of the overseas debt of the private sector itself. Indonesia had a bitter experience in 1997 when overseas debt of the private sector was not monitored and left uncontrolled, resulting in the outburst of monetary crisis which drove this nation to the brink of bankruptcy.

               

To learn a lesson from past experience, it was advisable for the present government to be constantly on the alert. So far the government rated debt ratio of the private sector as safe, although the use of debt that bears the risk of mismatch might repeat the economic crisis of 1998.

               

So far the government was always under the assumption that debt ratio was safe, because it was still below the 60% limit against GDP. However, ratio of government’s debt at 23%, which means it had the potential to repeat economic crisis of 1998.

               

Moreover it was not impossible that crisis might repeat in case of mismatch. Generally a private company borrowed overseas money quoted in foreign currency, but invest in protects that yielded Rupiah or not export oriented. This was the root of mismatch so when private debt turned to mismatch, in fact there was the big risk of bubble.

               

BI’s data showed that up to February 2013, total overseas debt banked or non bank came to USD 127.09 billion. This amount was higher compared to that in January 2013 which was only 125.05 billion and by far bigger than February 2012, which was USD 109.42 billion.

               

Although ratio of overseas debt of the private sector was more than 60%, it was still tolerable as long as the utilization was export oriented so it bounced back in foreign currency. A condition as such was believed as not crisis prone. For comparison, Indonesia’s overseas debt was different from that of Japan, whose ratio was close to 230% to Japan’s GDP. This was because the products made by Japanese industry was export-oriented; so it came as no big problem to Japan as they could do refinancing.

               

Lately, the high financing offer from abroad was temptation for private companies to borrow money, since the interest offered was lower than that of domestic lenders. One point to be cautions about was that there was big risk because the money borrowed was subject to volatile exchange rate. The risk for Indonesia was loud and clear, as signaled by the Fed in American who planned to stop the quantitative Easing [QE] policy.

               

The Fed’s policy would generate negative sentiment because the stock of foreign currency at home would tend to shrink as USD would be absorbed back to the country of origin. The result was that USD would be more expensive, being appreciated by high demand. On one contrary, Rupiah would turn clumsier as seen in the past few weeks.

               

Furthermore, other risk of high overseas debt of the private sector was that if the short term credit was invested in long term projects, which was usually in the property sector. Such would create mismatch which endangered life of private corporations.

               

There were other risks i.e. if the borrower company got loan with fluctuative interest but at home extended in fixed interest, which meant increased interest due for the said company. Again this was another case of mismatch which had the potential to endanger company’s operations.

               

The conclusion was that the size of overseas private debt in Indonesia posed as trigger to crisis at home. Moreover if economic growth in China held bubble due to piling up to of debt I the infra structure sector. it was not impossible that bubble in China might infect Indonesia in the form of economic crisis transmitted through Indonesia’s sizable overseas debt.

               

China could be the indicator crisis potential in Indonesia, although economic slowdown in China was more toward the formation of new equilibrium. Besides, the national private companies might have difficulty in obtaining USD to fulfill their payment obligations amidst adverse economic condition in Europe, in spite of bettered US economy. As known Indonesia’s deficit of trade balance was still wide, which made if difficult for Rupiah to be appreciated.

               

Hence BI together with the government must be pro-active in monitoring, observing, and controlling the development of overseas debt of the private sector so as not being a time bomb of the future.

               

The overseas debt controlling team already formed by BI or the government must be actively exercising their main task so the overseas debt off the private sector could be healthily well managed. The team was striving to bring the ratio of private debt close to that of the government’s debt at around 23% so while creating a sense of security, it could also bring positive sentiment to the moneymarket. (SS)  

Business News - June 28,2013