Indonesia’s Massive Foreign & Domestic Debts

With 18 countries within Paris Club alone, it will take 40 years to pay them off all of those debts if Indonesia can pay its obligation every year for the last 40 years. If not, it will certainly take longer…right?

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How about Indonesia’s debts with Asian Development Bank (ADB)? How about Indonesia’s debts with Japan Bank International Cooperation (JBIC)? How about Indonesia’s debts with the World Bank?

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With 18 countries; members of the PARIS CLUB alone will take at least 40 years. How long does it take to pay off Indonesia’s other debts with ADB, JBIC and the World Bank? Will it take a generation?

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That is not it. Those are just Foreign Debts. On top of these massive debts, Indonesia is also having mounting Domestic Debts for billions and billions dollar. With the IMF blunder alone, Indonesia had to swallow $80 billion dollar. How about the other blunders that you have never heard on the media? Look at the figures!

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If we think Indonesia as a big corporation or company, this corporation has too much public debts and filling bankruptcy is much better off than maintaining its operation with that financial condition. This was the condition of Indonesia in 2002 where its total foreign and domestic’s debts stood at 80% of its GDP. It was even worst in the previous years.

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In 1997 with South East Asia economic crisis coupled with Indonesia’s domestic banking disaster, rupiah currency had lost 85% of its value against USD (US Dollar), Indonesia’s stock exchange index had fallen by 50% and in that one year alone, income per capita was reduced by 15%. By the end of 1998 early 1999, Indonesia’s debts became unsustainable stood at $143 billion, which was equivalent to its total GDP.

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In other words, Indonesia’s total foreign and domestic debts stood at 100% of its GDP. It was not only threatening fiscal sustainability but it made very difficult for the country to operate and let alone of financing the needed basic infra structure. As a result, poverty in Indonesia risen from 11% in 1997 to 50% in 2001. That was over 107 million Indonesians living under poverty. The $1.4 billion poverty alleviation program that was launched by the Indonesian government in 2007 did not even scratch the surface, if not missing the point addressing the underlying issue of poverty.

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It does not take a genius to figure it out that there is a direct correlation between the government’s massive debts and its citizen’s prosperity and poverty. The more bankrupt the government is, the more likely its citizen will suffer due to lack of funding for public services and infra structures.

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Since 1997, over 39 million people lost their job. The government’s program to give out $110,000 US dollar to villages to create new million jobs did not work or made sense. Despite vigorous attempt by SBY administration to stipulate economy and the current 7% economic growth in 2008 is still insufficient to provide all new-job seekers with employment, let alone dent Indonesia’s huge unemployment tally which stood at 9.8% in February 2007 which was over 23 million people being unemployed.

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This 7% economic growth that was promoted is just like a drop of water in an empty big bucket. It is just too insignificant to address unemployment in Indonesia. In 1998, Indonesia’s debt to export ratio (DER) stood at 251.70% (yes, this was not a mistake), while its debt service ratio (DSR) stood at 33%. To fund the country’s national budget (APBN) in 2004, Indonesia had to borrow money from IMF (International Monetary Fund) through CGI (Consultative Group for Indonesia) for $2.8 billion dollar.

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Look, even to pay its operation cost for the country including payroll (gaji pegawai negeri), Indonesia had to borrow money form foreign countries. How long Indonesia is going to be remaining dependent on other foreign countries and bug down in this deep debt trap?

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If we think Indonesia as an automobile, the issue is not only with incapable driver, but it is also with the car itself that has been tangled with wiring and engine problem per say and make it difficult to run smooth and fast on the road, fast enough to compete with other moving vehicles on the same path. This chronology reflects and represents the value of Indonesia’s currency (Rupiah) compared to USD (US dollar) that has been weakening for decades. In the 80’s, $1 was equal to about Rp.850. Now 28 years, it has been nine times (9X) worst as in 2008, $1 (USD) equal to over Rp.9.000,-

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In 2005 it reached all time low, in which Rp.15.000 was equal to $1 (USD). This shows that the overall Indonesian’s economy compare to US economy is not getting better; it is nine times worse since the 80’s. The fact that there is no significant economic policy by the Government of Indonesia from the previous and the current administration to address this significant issue is just mind boggling.

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With no measure in place to deal with its consequences, inexperience IMF councils instructed Bank of Indonesia to shut down 16 banks. Indonesia was forced to bail out 16 different banks creating $60 billion new debts that did not exist before, which later on became $80 billion in total on top of other mounting debts that Indonesia already has. In return IMF loaned Indonesia $43 billion called Emergency Financial Package with string attached. This IMF package required elimination of social subsidies on fuel and food, causing acute hardship to the millions of poor Indonesian triggering public demonstration and turmoil that brought down Suharto’s regime.

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What is so wrong with this IMF debacle is the fact that the IMF forced Indonesia to turn massive private debts to become government debts; making private debts becomes public debts, which is in away burdening more to Indonesia’s tax payers, the millions ordinary Indonesia people that will have to pay for it. This was not a highway robbery, it was a country robbery.

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Creating $80 billion dollar new debt to get $43 billion dollar loan from the IMF was a complete rip off if not criminal in nature making Indonesia in much deeper and deeper debt trap. That was $123 billion dollar mistake and the biggest irresponsible if not criminal public’s conduct in the name of Indonesian people by their very own public officials. What a tragic blunder! But that was not the only big blunder. There are other big blunders happening and it is just too long to mention here.

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Indonesia is a country and not a big corporation, filling bankruptcy or filling default is a very difficult option and the last source that any leader would ever consider. If not well-prepared and carefully planned, the long term repercussion can be disastrous and fatal.

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How bad is this massive debt?

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Picture this. State of California as being the 5th largest economic power in the world is now having $15.2 billion in deficit. Look at what the Governor and the Representatives at the State Senate in Sacramento have been doing. They have been debating and pressuring each other on how to balance the budget. In terms of GDP size, California as a State has bigger GDP than Indonesia as a country. With only $15.2 billion dollar deficit in the State budget, these Representatives from both parties and the Governor have been debating left and right on how to resolve the issue.

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Now let’s look at Indonesia. In 2002, Indonesia’s Domestic and Foreign Debts stood at $152 Billion dollar, which was equal to 80% of its GDP. It was Rp.1.370.0 trillion Rupiah in debt while the size of its GDP was Rp. 1.716.5 trillion rupiah.

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In December 2006, Indonesia’s total public debt stood at $144 billion USD dollar, 48% of its GDP. By the end of 2008, Indonesia’s Domestic and Foreign debts are projected to stand at about $136 billion dollar, which is around 36% of its GDP. This figure can be different and varies subject to the world average oil price fluctuation per barrel. Compared to $15.2 billion deficit in California, the $136 billion dollar debts is much tougher burden for Indonesia besides the debt amount is 9 times bigger, its GDP is smaller than California.

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Even with these massive debts, I have not seen any outrage, any heated debate about it; I have not seen any of these Presidential candidates or parliament members addressing this issue vigorously? They are just pretty much adem ayem. Why? Do they know about this issue or they just don’t care about it because it does not affect them?

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The majority expenditures of Indonesia’s national 2007 budget approved by the Parliament on October 17 were pretty much sucked up by the central government. Out of Rp.763.6 trillion government’s total expenditures for the entire country, Rp.504.8 trillion alone was spent by the Central Government. That is over 66% of the total expenditures while the total revenue was projected at Rp.723.1 trillion based on average oil price at $63 per barrel. Even with this approved budget, Indonesia was projected to have about Rp.40.5 trillion in deficit (about -1.1% of its GDP).

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What excluded in the budget deficit calculation spreadsheet were the monstrous public debts, which stood at $144 billion US dollar in 2006. If those massive public debts are included in the budget’s calculation spreadsheet against revenue and spending, how many years will Indonesia be finally able to balance its budget? In other words, the projected deficit to stand at Rp.40.5 trillion (-1.1% of GDP) was a metaphorical deficit and not in a real sense deficit because much of the liability owed by the Indonesian government to Paris Club (18 countries), Asian Development Bank (ADB), Japan Bank International Cooperation (JBIC) and World Bank was not included. Are we being fooled?

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What is at stake and what are the problems for Indonesia?

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The 1st problem: “Our debts are in US dollar and our currency is in Rupiah. The loan repayments will INCREASE as the Rupiah continues to depreciate. Make it much more challenging and difficult! This means that the ordinary people of Indonesia have to work MUCH and MUCH HARDER as tax payers to keep up with the increasing US currency. That translates to the much longer time needed for Indonesia to be able to pay off its massive foreign and domestic debts if not for a generation to come.”

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The 2nd problem: “The Indonesia’s ability to pay these loans will DECLINE as the debt service ratio (DSR) has risen over the years from 33% in 1996 to 50% in 1998. The ability to repay these debts will depend on EXPORTS, and exports are greatly dependent on “demand and supply.”

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On the demand side, Indonesian market had about 64% in Asian region. But on the supply side, the real sector was very poor, unable to operate due to the debt repayment problem and lack of MARKET CAPITALIZATION. This will translate the declining value of the Rupiah against other currencies, especially, the US currency.

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On the other side, with virtually no significant ability from the Indonesian Government to stipulate domestic economy due to lack of funds and massive debts, the trend continues and domestic consumption will have to be imported and thus eliminating the change for Indonesia in capturing its DOMESTIC EQUITY MARKET. This translates the likelihood of declining and weakening the currency Rupiah against US Dollar.

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With no MARKET CAPITALIZATION and DOMESTIC EQUITY MARKET, the currency Rupiah will most likely continue to weaken. This is a double deep. That means the ability for Indonesia to pay off its massive debts will take much longer time, beyond imaginable. It is a sad reality that with this bad economy, there is no sound Government economic policy; it is either non-existence or chaotic that is undertaken to remedy this issue in a country that is so rich with natural resources.

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The 3rd problem: “Because the required loan repayment is so large and so humongous, the potential and funds needed to stipulate the economy are lacking. What does it mean? That means as Indonesia is lacking of fund needed due to massive debts to stipulate its economy and to rebuild the broken infra structures, this will make it impossible for Indonesia to improve its current condition. This condition triples already complicated matters. It is high possibility that the condition will likely to get worse each year as we have seen for the last 28 years with its currency value.”

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This just amazes me that one former President of Indonesia did not even know the size if Indonesia’s public debts. It is mind boggling that not even a single current presidential candidate ever brought up this issue on the surface to be debated publicly and openly.

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The 4th problem: “Such an immense debt stock could exacerbate adverse public perception and expectations (false hopes).” This situation is just like a combustion chamber with high density, where a tiny spark can create an explosion burning the entire chamber, making Indonesia susceptible to external shock and turmoil. We have seen this happening in 1998.

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It is beyond any reasonable doubt that Indonesia’s massive foreign and domestic debt is the most pressing issue facing Indonesia at this time and this shall be the number #1 issue and a top priority that any new President of Indonesia has to be challenged to deal with.

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Detail Debts and Payments to PARIS CLUB

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