Is the Country's Growing Debt Really That Dangerous?

Every time the government’s debt figures increase, the public sphere is immediately filled with concern. Some worry the country will go bankrupt; others feel it is not a problem as long as the debt-to-Gross Domestic Product (GDP) ratio remains low. No country is free of debt, except for a few small nations like Liechtenstein, Macau, and Brunei Darussalam. Even the world’s most advanced countries continue to issue bonds and borrow funds from financial markets. So, why do countries go into debt and can that debt generate added value for the economy? Indonesia’s debt ratio is around 40 percent of GDP. This figure has increased compared to a decade ago, but it is still far below the 60 percent threshold set by law. Even compared to other ASEAN countries, Indonesia’s position remains relatively moderate. Some of the world’s richest countries actually have much larger debt ratios than ours. Japan, for instance, records a debt ratio of more than 250 percent of GDP, the highest in the world. The United States is around 120 percent, Italy around 135 percent, and France exceeds 110 percent. Strangely, no one calls Japan or America a country on the verge of bankruptcy. Japan is often cited as an economic paradox. On one hand, the country has the highest debt ratio in the world. On the other, Japan remains one of the most stable economies. There are three main explanations. First, about 90 percent of Japanese government bonds are owned by domestic investors, from households and banks to insurance companies and pension funds. The government does not rely heavily on foreign funds, making it relatively safe from capital flight turmoil. Second, almost all of its debt is issued in yen. Because the Bank of Japan controls monetary policy, the risk of default due to a shortage of foreign exchange is much smaller. Third, interest rates on Japanese bonds are very low. The interest burden the government must pay remains manageable even though the nominal value of the debt is very large. In other words, Japan has a large debt, but the cost of managing that debt is relatively cheap. Thus, what matters is not the size of the debt, but the ability to manage it. Conversely, there are countries that have almost no debt at all. Liechtenstein has a debt ratio of only about 0.5 percent of GDP. Macau has recorded zero percent government debt for years. Brunei Darussalam is only around 1–2 percent, while Tuvalu is around 3 percent. However, their situations are not easy to replicate. Liechtenstein is an international financial services centre with more registered companies than residents. Macau earns huge tax revenues from its casino and tourism industries. Brunei enjoys abundant oil and gas revenues with a population of less than half a million people. Tuvalu receives additional income from managing the ‘.tv’ internet domain and has relatively small public spending needs. Indonesia is in a very different situation. With more than 280 million people spread across thousands of islands, the government must build roads, ports, schools, hospitals, dams, electricity networks, defence systems, and social protection. Its financing needs are far greater than those of those micro-states. But why does Indonesia still go into debt when it is rich in natural resources? The answer is not as simple as ‘because the resources are stolen’ or ‘because the government is wasteful’. Natural resources are indeed high in value, but turning them into state revenue requires very large investments. Deep-sea oil and gas exploration, nickel smelter construction, port networks, power plants, and industrial estates all require hundreds of trillions of rupiah in capital. The state often does not have enough cash on hand, so debt financing becomes a common option. What must be ensured is that the debt truly generates new economic capacity. If debt is used to build productive infrastructure, improve the quality of education, strengthen health services, or accelerate industrial downstreaming, the economic benefits can be felt in the long term. Conversely, if debt is spent on routine expenditure, unproductive projects, or even corruption, future generations will only inherit the bills. This is where Indonesia’s main problem lies. The biggest issue is not merely the size of the debt, but the persistently high leakage of state revenues. The tin trading corruption case in Bangka Belitung is a clear example. The state losses and environmental damage in that case are estimated to reach around Rp300 trillion, comprising ecological damage, lost potential state revenue, and recovery costs. Imagine if such a leakage could be prevented. The government’s financing needs would certainly be much reduced. Therefore, improving the governance of natural resources is often more effective than simply debating the addition of new debt. Many wealthy countries not only manage debt carefully but also build sovereign wealth funds. Norway invests its oil surplus in various global assets so that the investment returns can be enjoyed by the next generation. Saudi Arabia does something similar through its Public Investment Fund. Indonesia has started steps in that direction through the Indonesia Investment Authority (INA). This institution was formed to attract co-investment with global partners into national strategic projects, so that development does not depend entirely on the state budget or government debt. To date, the value of assets managed by INA has reached hundreds of trillions of rupiah.