Indonesia’s debt alarm sounds as Debt Service Ratio breaches 42% — what does it mean?
Jakarta, CNBC Indonesia — The ratio of government debt payments to state revenue is beginning to signal caution. For a long time we have fixated on how large the government’s debt ratio is relative to Gross Domestic Product (GDP), known as the Debt to GDP ratio. Yet there is one indicator that is actually far more important and should not be ignored, namely the Debt Service Ratio (DSR).
If total debt describes how heavy the burden is, then the DSR shows how large a portion of state revenue is spent solely on paying debt obligations.
Understanding What Debt Service Ratio is & Why it Matters
Referring to the Finance Ministry’s study, the DSR is an indicator of how large the state’s revenue capacity is to meet debt payment obligations, including principal repayments and interest.
In simple terms, the higher the DSR, the larger the share of state revenue absorbed by debt service, so fiscal space narrows and fiscal vulnerability increases. Conversely, a lower DSR reflects a lighter debt service burden, so risk and fiscal vulnerability tend to decline.
The calculation method, essentially simple, is to compare total debt payments with state revenue in the same period.
Why DSR Is Quite Important?
DSR is important because it can have a direct impact on the sustainability of the state’s finances. When that share grows, fiscal space automatically narrows because the national budget has less room to fund other priorities.
As for what constitutes a safe level, there is no single figure that applies in all countries. The healthy threshold depends on revenue strength, debt structure, and financing conditions.
However, a number of analysts and economists often refer to a band of 25% to 30% as a safe limit. When the DSR sits well above that range, governments face several consequences.
- Narrowing Fiscal Space
When the DSR rises, a larger portion of government revenue is diverted to debt payments. As a result, the budget for priority programmes such as development, public services, or social protection could be constrained.
- Economic Warning Signals
DSR makes the budget more readable in terms of its sensitivity to shocks, for example when the economy slows, revenue falls, or global interest rates rise. In such conditions, debt service can increase rapidly and add financing pressures.
- Borrowing Costs Higher
If the DSR continues to deteriorate, investors’ risk perception may rise. In the end, when the government issues new debt or refinances, the yields demanded by the market could rise and again press on the national budget.
The calculation method, as noted, is simple: compare total debt payments with state revenue in the same period.
So, What Is Indonesia’s DSR Position Right Now?
Based on a survey of the Central Government’s Financial Reports (LKPP) per year, Indonesia’s debt service ratio has for several years now stood above the level deemed safe.
In 2024, the government’s DSR was recorded at 42.3%, meaning that for every 100 rupiah of state revenue, around 42 rupiah is used to service debt obligations.
In our calculation, for 2024 and preceding years the government bore the burden of debt payments both domestically and abroad, covering principal and interest. This calculation does not include SLA payments or Subsidiary Loan Agreement.
The DSR figure for 2024 was higher than 2023’s 38.2% and 2022’s 34.4% when looked at over time. If looked further back, the DSR was high in 2020 at 46.8% and 2021 at 44.9%.
However, it should be noted that the spike in those periods occurred when the world was struck by the Covid-19 pandemic, which depressed economic activity and also cut state revenue.
With that picture, it is time to read debt risk not merely in terms of debt-to-GDP ratio, but to also pay close attention to the debt service ratio because this indicator shows the cash-flow pressures truly felt by the national budget.
As Indonesia’s DSR remains above the band commonly cited as safe, the government needs to be more disciplined in safeguarding fiscal space through revenue enhancement, spending efficiency, and more cautious debt management so that the debt service burden does not continue to grow.
Mitigation steps are essential so that future risks, from rising interest rates, economic slowdowns, to increasing financing needs, do not turn into pressures on fiscal stability and the economy.
CNBC Indonesia Research