Above 15%: S&P Warning and the End of Indonesia's Yield-Dependent Rupiah Era

A single statement from S&P has prompted widespread discussion: Indonesia’s interest payments have “very likely” exceeded 15% of government revenue (using S&P’s calculation methodology), and if this figure persists, it could fundamentally alter how the rating agency perceives Indonesia’s credit profile.

Suddenly, everyone is discussing fiscal matters as though this were merely a budgetary issue. Yet the implications run deeper and more subtly through the monetary-external architecture that, for years, has relied upon yield as the anchor of stability. At a certain point, stability purchased through a return premium certainly feels “safe”, but it leaves a troubling legacy: an ever-growing interest burden that increasingly constrains fiscal space.

I recall a conversation in 2018 with the late Dr Rizal Ramli. The atmosphere was tense but frank. He gazed at a graph of Indonesia’s state bond yields and asked, in a tone that admitted no half-measures: “Why must we pay so dearly? Surely we can find alternative financing solutions?”

At that time, the 10-year yield on Indonesian government bonds had reached 8.5% amid dollar pressures. Our real yield ranked among the highest in emerging markets and frequently served as a “selling point” for global investors: Indonesia offered attractive carry with relatively predictable policy.

On the surface, Rizal Ramli’s argument sounded simple and logical: if inflation were contained and the economy needed growth through infrastructure stimulus, why should the state offer such a premium?

However, 2018 was not merely a domestic story. The world was shifting direction. The Federal Reserve was tightening, the dollar was strengthening, the current account deficit was widening, and the trauma of the 2013 taper tantrum still haunted policymakers’ memories. In such circumstances, state bonds became more than mere APBN financing instruments. They transformed into an external anchor, a defensive tool when capital flows reversed.

We must be honest: at that time, high yields were not a “mistake”. They represented a rational response to structural economic constraints. A current account deficit required financing, and that financing came through portfolio capital inflows, with state bonds being the rational choice. To maintain these flows, Indonesia provided an incentive: high yields as the price of stability, and rupiah stability as credibility.

In inflation-targeting theory, central banks focus on inflation targets with output gaps as one variable. In emerging market practice, however, a third variable lurks behind the scenes: the exchange rate. In theory, the Taylor Rule suggests interest rates should follow inflation and output gap deviations. In practice, we add an unwritten line: external pressures.

In 2018, those external pressures were real. Monetary policy tightened, interest rates rose, yields were kept attractive. The rupiah stabilised. Credibility held. Yet every policy carries costs, and those costs often go unfelt in the same year.

What happened gradually was a structural shift: banks became more comfortable holding state securities than extending credit; high real yields slowed money circulation, velocity declined, and tax revenues grew slower than expected. Monetary targets were met, yet the fiscal foundation began bearing an increasing burden.

Therefore, when the 15% figure appears on S&P’s screen, we are not witnessing a sudden event. We are witnessing the cumulative consequence of a policy architecture: when yield functions not merely as a debt price but also as a balance-of-payments stabilisation tool, with fiscal policy bearing part of that cost.

The question is no longer whether past policy was wrong. The question is: whether policies that were once correct remain relevant for the future.

Because at a certain point, yield that once supported the rupiah has transformed into a fiscal burden. That 15% figure is not merely a ratio: it is a psychological threshold, a boundary between stability purchased at a fair price and stability that has become too expensive to maintain.

From Taper Tantrum to Dollar Cycles: When Yield Gradually Becomes a Monetary Anchor

To understand why the interest-to-revenue ratio now presses toward 15%, we must return to one crucial moment: the 2013 taper tantrum. When the Federal Reserve signalled a reduction in quantitative easing, global capital flows reversed swiftly. Emerging market nations with current account deficits immediately came under scrutiny, Indonesia among them.

At that time, Indonesia’s current account deficit reached levels considered precarious. A deficit exceeding 3% of GDP was more than a figure; it was a message to markets that external financing had become a structural necessity.

Under a regime of free capital mobility, current account deficits must be financed by financial account surpluses. The logic is straightforward: if we cannot generate sufficient dollars from trade, we must attract them through capital flows. And to attract capital, we must offer returns.

From that point onward, Indonesia’s policy structure underwent a subtle yet fundamental shift: state securities no longer functioned solely as fiscal financing instruments. They became part of balance-of-payments management.

Yield ceased being merely a debt price; it became a premium for external stability. Whenever minor shocks occurred, analysts were summoned to Thamrin or Lapangan Banteng—as those of us who remember that era can attest.

When the dollar strengthened and the Fed tightened, nations with wide current account deficits faced difficult choices: either allow their currencies to depreciate sharply, or raise returns to maintain capital attraction. Indonesia chose the latter path, and that choice echoed through years of policy decisions to follow.