Our foreign debts
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.