Debt management and govt's financial reporting

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.