Is the Country's Growing Debt Really That Dangerous?

Every time the government’s debt figure rises, public space is quickly filled with worry. Some fear the state will go bankrupt; others feel it is fine 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 such as Liechtenstein, Macau and Brunei Darussalam. Even the world’s most advanced countries continue to issue bonds and borrow from financial markets. So why do states borrow, and can that debt generate added value for the economy?

Indonesia has a debt ratio of around 40 per cent of GDP. This figure has indeed risen compared to a decade ago, but it remains far below the 60 per cent ceiling set by law. Even compared to ASEAN countries, Indonesia’s position is still relatively moderate.

Some of the richest countries in the world actually have far higher debt ratios than we do. Japan, for instance, records a debt ratio of more than 250 per cent of GDP, the highest in the world. The United States is at around 120 per cent, Italy around 135 per cent, while France exceeds 110 per cent. Strangely, no one calls Japan or America countries on the verge of bankruptcy.

Why Has Japan Not Gone Bankrupt?

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, around 90 per cent of Japanese government bonds are held by domestic investors, ranging from households and banks to insurance companies and pension funds. The government does not rely heavily on foreign funds, so it is relatively safe from capital flight shocks.

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, Japanese bond interest rates are very low. The interest burden the government must pay remains manageable even though the debt value is enormous. In other words, Japan has large debts, but the cost of managing that debt is relatively cheap.

So what matters is not the size of the debt, but the ability to manage it.

Why Are There Countries With Almost No Debt?

Conversely, there are countries that have almost no debt at all.

Liechtenstein has a debt ratio of only around 0.5 per cent of GDP. Macau has even recorded zero per cent government debt for years. Brunei Darussalam is only around 1–2 per cent, while Tuvalu is around 3 per cent.

But their situations are not easy to replicate.

Liechtenstein is an international financial services centre with more companies than residents. Macau derives enormous tax revenue from the casino and tourism industries. Brunei enjoys a windfall of oil and gas income with a population of less than half a million. Tuvalu earns additional revenue from rights to manage 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 micro-states.

Natural Wealth Is No Guarantee

But why does Indonesia still borrow despite being rich in natural resources?

The answer is not as simple as “because the nation’s wealth is stolen” or “because the government is wasteful”.

Natural resources are indeed valuable, but transforming them into state revenue requires enormous investment. Deep-sea oil and gas exploration, nickel smelter construction, port networks, power plants and industrial estates require hundreds of trillions of rupiah in capital. The state does not always have sufficient cash, so financing through debt is a common option.

What must be ensured is that the debt genuinely creates new economic capacity.

If debt is used to build productive infrastructure, improve the quality of education, strengthen health services or accelerate industrial downstreaming, its economic benefits can be felt over the long term.

Conversely, if debt is exhausted on routine spending, unproductive projects or even corruption, future generations will inherit only the bill.

Plugging the Leaks

This is Indonesia’s core problem.

The biggest issue is not merely the size of the debt, but the still-high leakage of state revenue.

The tin trade governance corruption case in Bangka Belitung is a clear example. The value of state losses and environmental damage in that case is estimated at around Rp300 trillion, comprising ecological damage, lost potential state revenue and environmental recovery costs.

Imagine if a leak of that size could be prevented.

The government’s financing needs would certainly be far lower.

That is why improving natural resource governance is often more effective than merely debating new debt.

Building an Endowment Fund

Many rich countries not only manage debt carefully, but also build sovereign wealth funds.

Norway invests its oil surplus in various global assets so that the returns can be enjoyed by future generations. Saudi Arabia does something similar through its Public Investment Fund.

Indonesia has taken steps in that direction through the Indonesia Investment Authority (INA). This institution was established to attract 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 under INA management has reached hundreds of trillions of rupiah and continues to grow.

That step is certainly not enough.

More important is ensuring that every state asset is managed professionally, transparently, and in a way that creates added value for society.

Governance Is the Key

Debate about debt is often trapped in numbers.

Yet a country can go bankrupt even with a low debt ratio, while another remains prosperous despite very high debt. Argentina defaulted when its debt ratio was only around 50–60 per cent of GDP, while Japan remains stable with a ratio above 250 per cent. Sri Lanka and Greece also experienced crises at debt levels far lower than Japan’s. The difference lies in the debt structure, the currency used, investor confidence, institutional quality and the government’s ability to manage fiscal policy.

That is why the far more urgent agenda is not simply reducing debt, but raising the productivity of spending, strengthening state revenue, eradicating corruption in natural resources, and managing national assets professionally.

Debt is merely a tool. Whether that tool becomes a burden or an engine of economic growth depends entirely on how those who govern manage the state.