Our foreign debts

President Soeharto has reassured the people once again that our foreign debts, currently estimated at around US$100 billion, including the $40 billion owed by the private sector, are well managed. The President made the remarks yesterday apparently to allay the fears that such a large amount of foreign debts would be a great burden for the next generation.

He reaffirmed that the official foreign borrowings have been used entirely for productive rather than consumer purposes. The funds have been invested to increase the country's economic assets. He said the government could easily repay all its foreign debts by selling part of the state-owned companies, which at present have combined assets of Rp 358 trillion ($179 billion). But such an outright amortization would not be efficient because most of the loans are long term and their interest rates, notably those derived from foreign governments, are relatively low.

The President's statement should be seen as highly credible because Indonesia's foreign debt management has been assessed as quite prudent by foreign creditors, including multilateral aid agencies, such as the World Bank, over the past two decades. The country has maintained a high level reputation of being a good borrower with exemplary debt-servicing records. No wonder, its international credit rating has always been fairly high.

Despite the impressive records, we don't think the President had any intention of belittling the consequence of the huge debts. Neither is it likely that he wanted to show an attitude of complacency on the part of the government with regard to the debt burdens.

Measured by whatever ratio, the $100 billion in debts is a very sizable sum. The debts have reached as high as 75 percent of our gross domestic product, or a level more than double our annual export earnings. Our annual foreign debt service burdens have exceeded 30 percent of our annual export earnings and account for 70 percent of the government's personnel budget, or 38 percent of the total operating budget for the state. In fact, the public sector's capital accounts can now be said to be in deficit in the sense that annual debt servicing and installment payments are larger than new borrowings.

These warning indicators, as reflected in the uncomfortable ratios, show that we are treading a very narrow and slippery path. We are widely exposed to the great risk of any rise in the international interest rates because almost 50 percent of the official foreign debts, notably those from the World Bank and Asian Development Bank are subject to variable interest rates which currently stand at a range of 6 percent to 7 percent. We also are highly vulnerable to cross-currency exchange rate fluctuations, as in the case of the recent steep appreciation of the yen against the American dollar. Even though oil and natural gas now contribute only about 25 percent of our exports, the oil price volatility still poses big dangers to our balance of payments.

That means that the verge between stability and instability is already very thin. Our leeway for maneuverability is becoming increasingly restricted. The slightest mistake in our macro- economic management could damage the international confidence in this nation with all the damaging repercussions on the monetary sector and eventually the economy as a whole. Any signs of relaxation in the debt management or in the prudent fiscal and monetary management may have a similarly damaging impact.

What makes our position all the more precarious is that all the risks related to our heavy exposure to foreign debts are beyond our management or control. The best we can do to cope with all of the inherent risks is to strengthen our economic resilience by maintaining prudent macro-economic policies, including the control of new borrowings by both the public and private sectors, and introducing reform measures to expand our export capability.

If our macro-economic management remains prudent and our exports continue to grow, our huge foreign debts will not likely cause inordinate worries in the international financial market and we will be able to weather any fallout from a financial crisis in other markets, such as the one in Mexico early this year. In fact, our success in coping with the repercussions from the Mexican financial crisis in early January and the yen's steep appreciation in March should be credited to our consistency in maintaining our macro-economic management.