Warning on Indonesian debts

Warning on Indonesian debts

Coordinating Minister for Economy and Finance Saleh Afiff's warning
on Indonesia's foreign debts which have reached a total of US$90 billion
is quite encouraging. That note of caution leaves us assured that the
government is fully aware of the potential danger of excessive borrowing
and is therefore taking safeguard measures to keep the indebtedness
level fully manageable.

Afiff warned that the total of foreign debts should be kept below
$100 billion, which he considered a psychological level, otherwise
Indonesia's credit rating would decline significantly and the cost of
new borrowing would rise.

Even though 40 percent of the total foreign debts are private-sector
borrowings, the potential dangers are nonetheless great because they are
commercial debts with much shorter maturities and much higher interest
rates, compared to the loans the government has taken. Moreover, the
risks of lending to Indonesia (country risks) are assessed not only on
the basis of the official debt burdens but also on the basis of the
private sector debts as well. After all, all foreign debts, be they owed
by the public sector or private sector, are serviced and repaid with the
same source of foreign exchange earnings -- the nation's exports.

As Afiff noted, there are several other reasons that are compelling
Indonesia to be extra careful about new borrowing. The first is the
sharp decline in the export growth last year due to the persistently
weak economies of the industrialized countries. Other factors are the
steady downward trend in the prices of oil, which still account for
about 30 percent of our export earnings and state budget receipts, and
the tendency of the yen to appreciate against the dollar. Last year, for
example, our foreign debt service burdens increased by 5.5 percent from
earlier estimates as a result of the 15 percent appreciation of the yen
in which around 40 percent of our debts are denominated.

Even now, the servicing and installments paid on official foreign
debts alone have exceeded $8 billion a year. These burdens will continue
to increase into the next few years as more loans become mature. Further
high increases in new borrowings will certainly cause strong pressures
on the balance of payments, with potentially damaging implications on
monetary stability.

The problem, though, is that we have to take out new loans to cover
the savings-investment gap, which is estimated by some economists at
about $13 billion a year. Hence, we see's Afiff's warning more as a
strong reminder that overseas commercial borrowings should be kept
within the government-set ceilings and should be allocated for highly
productive projects that support the export drive.

As early as 1991, the government set commercial borrowing ceilings
for 1994 and 1995 respectively at $4.8 billion and $4.9 billion. The
private sector has been allocated $3.3 billion in each of the two years
and the central bank and state commercial banks $1.5 billion. We see
Afiff's warning in Tuesday's address at a mining seminar as a strong
appeal to the public, notably the private sector, to help safeguard the
borrowing ceiling. His public appeal apparently is necessary because
several business groups with strong political connections are pushing
hard for big, long-term projects with high import content without fully
realizing their impact on the balance of payments. Only with a well-
managed balance of payments will the government be able to avoid what
Minister of Finance Mar'ie Muhammad terms as "shocking monetary
policies."

The danger is that if the foreign debt burdens increase to such an
extent that strong pressure is exerted on the balance of payments,
Mar'ie might have to eat his words and take drastic monetary measures
with all their serious implications on macro-economic stability.