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.