Debt management and govt's financial reporting

David E. Sumual, Jakarta

The Ministry of Finance recently introduced a new type of financial statement that will be a valuable tool in gauging the government's financial soundness in a more comprehensive way. Regardless of how it is sliced and diced, this unaudited balance sheet marks a historic milestone in Indonesia's financial reporting, as it is apparently the very first balance sheet ever completed by the government since the country gained its independence.

With countries competing against each other in the globalized marketplace, Indonesia should indeed be run like a corporation that regularly publishes its financial reports. By having a government balance sheet, investors -- especially those who put their money into Indonesia's government bonds -- are better informed about the country's financial position.

This is particularly true given the increasing amount of outstanding government rupiah bonds that stood at Rp 409.2 trillion (US$43.05 billion) in April 2005, not counting the government's $2.4 billion in dollar-denominated bonds.

More importantly, the government will be better equipped with this new financial information, thus improving its decision- making and policy formulation. The impact of government policies on the nation's fiscal standing will also be better measured. As such, many serious problems confronting the country over the long term could be anticipated.

For example, government fiscal policies in place today -- such as tax reform, the slashing of fuel subsidies and other changes in tax and/or spending policies -- will have a significant impact on long-term fiscal sustainability. And without having complete information on the long-term fiscal perspective, these policies would be doomed to fail, crippling the economy and adversely affecting the quality of life of Indonesians in the future.

The significance of this balance sheet originates from its nature as the best source of information on the government's holdings of monetary assets, non-cash items and liabilities. Regrettably, this report reveals that the current generation is still mortgaging the country's future income, or borrowing from the future to support current expenditure needs.

The 2004 balance sheet shows government assets of Rp 831 trillion and liabilities of Rp1,346 trillion, for a negative net position of Rp 515 trillion. And in relation to the size of the economy, this debt represents 58 percent of GDP in 2004. This also means that every single person in Indonesia -- even newborn babies -- are in debt to the tune of about Rp 6.2 million.

The report also shows that the government had a high liability to asset ratio of 161 percent. In a corporation such a high liability to asset ratio indicates a risk of insolvency; in short, a company such as this would be technically bankrupt.

Unlike companies, however, governments can't go out of business as they have the power to collect taxes that should ensure a steady stream of income. Moreover, the government does not have to pay down these loans, as the maturity of the government's debt can actually be extended indefinitely. In short, when government bonds mature, they can simply be rolled over by auctioning off more paper to other lenders.

As such, it is imperative that the government create a healthier economic environment to reduce the debt:GDP ratio until it falls to a more comfortable level. An optimistic scenario reveals that the government's debt:GDP ratio could actually fall to 20 percent by 2016. This is based on the assumption that the net amount of debt remains the same and that GDP growth is maintained at an average 5 percent.

Otherwise, Indonesia will remain a debt-addicted country. This means that the state has to borrow more and more money to cover its obligations, and eventually interest payments will spiral out of control. And like an insolvent credit-card holder, the country could eventually only afford to pay its minimum payment due, as such placing an unfair burden on future generations. The impact on domestic capital formation is also clear.

As the government enters the capital market to finance its deficit, it at the same time competes with private borrowers, thus driving up interest rates and diminishing investment. More worryingly, the country's current accompanying loss of competitiveness, if it remains unaddressed, would speed up the accumulation of debt, which in the long run will threaten the nation's economic fundamentals.

It is important to note that Indonesia does not have the luxury of high debt:GDP ratio as in developed countries. Although Japan's debt is now around 130 percent of its GDP, making it the largest public debt liability in the world, they do not have to be too concerned as most of its debt is financed by its own national savings. And the United States is even becoming a unique case in public economic history.

Unlike developing nations, the U.S can spend more than it earns without having to raise taxes. This can happen as long as foreigners are still willing to finance U.S. deficits. In other words, investors' comfortable level of a negative net position is apparently higher in the U.S. than in developing countries like Indonesia. This may relate to the U.S.'s geopolitical status, the U.S. dollar as an anchor currency, its huge consumer market, its reputation as a center of innovation and its relatively advanced financial infrastructure.

All in all, given the importance of the government's financial reporting for a well-founded fiscal strategy, the department of finance should announce the government's balance sheet at least annually. This is particularly true because timeliness and time series data of the government's financial statements are essential elements of any attempt to address Indonesia's long- term fiscal challenges.

Taxpayers as the shareholders of the government should also have the right to receive accurate accounting statements. As such, a number of steps will be necessary to improve reliability of these reports, including making sure that the government's financial statements are in compliance with generally accepted accounting principles.

The writer is an analyst at the Danareksa Research Institute. This article represents a personal opinion.