Will Danantara Finance Weapons Procurement?
One of the current administration’s priority programmes receiving significant funding is defence spending, where financing is sourced not only from the annual State Budget (APBN) but also from Domestic Loans (PDN) and Foreign Loans (PLN).
The Ministry of National Development Planning/Bappenas has allocated a domestic loan quota of Rp 54 trillion for the Ministry of Defence for the 2025-2029 period, while the foreign loan quota for the same period is US$34.8 billion. This US$34.8 billion figure may not be final, as increases in allocation are highly possible in the near future. Given the character of the current administration, an increase in foreign loans for defence spending is almost inevitable, using the events of five years ago as a reference.
As previously noted, after Bappenas released the Medium-Term Domestic Loan Plan (DRPLN-JM) specifically for 2025-2029 in March 2024, several foreign nations offered significant bilateral loans to Indonesia. This is related to various weapon systems being marketed to Indonesia, which are believed to not yet be covered in the 2025-2029 Special Blue Book. Furthermore, there are defence equipments likely to be purchased by Indonesia that are suspected to be outside the current foreign loan allocation for the Ministry of Defence. According to calculations, if both these elements are accommodated, the foreign loan allocation could reach or approach US$50 billion.
In recent developments, there is a possibility that the government will revive massive defence spending plans that failed in 2021. This long-term defence spending plan would be executed within just three to four years, namely during the current administration’s term. It is certain that several risks will shadow the implementation of such a plan, both from a fiscal perspective and regarding the operational reliability of the purchased war equipment. The question is whether the government is concerned with such risks, considering they are long-term and cross-administration in nature.
Discussing defence spending is inseparable from the fiscal aspect—specifically, where the money will come from. If the government intends to increase the foreign loan quota for weapon systems to nearly US$50 billion, funding could be obtained through Export Credits (KE) provided by the two nations offering their products to Indonesia. However, if the government wishes to increase defence spending massively, as proposed in 2021, it is unlikely that Export Credits and Foreign Private Creditors (KSA) will suffice. Where, then, will the funding come from if the government wants to implement long-term defence spending within the current administration’s term?
Citing credible sources, the Ministry of Defence is currently exploring financing from Danantara to support the implementation of a massive defence spending plan, similar to the US$124.9 billion proposal from 2021. The concept of involving Danantara in weapon procurement programmes suggests that conventional methods, such as using foreign loans from international financial institutions and banks, cannot meet the Ministry of Defence’s ambitions, given that Indonesia’s Debt Service Ratio is already well above safe limits.
It is certain that further discussions between the Ministry of Defence and Danantara regarding this plan will involve the Ministry of Finance as the fiscal authority, because any massive acquisition of war equipment will create new debt, necessitating risk management by the Ministry of Finance. Regarding the plan to involve Danantara in defence equipment procurement, several matters must be carefully considered.
Regarding the funding source, will it come from import credits provided by state-owned banks, or will the government issue special debt securities to be purchased by Danantara? If the funding comes from import credits issued by several state-owned banks, do they have the capacity to provide credit facilities in such large amounts?
Assuming US$100 billion is required to fund massive defence spending, will this not create a ‘crowding out’ effect that impacts economic growth because the commercial sector cannot access credit as it should? If several state-owned banks are asked to provide foreign private credit through their overseas branches, are they capable of providing credit facilities of such massive value? Would they not require the formation of syndicates with international financial institutions and banks to provide such large foreign loans?
If so, how will international financial institutions and banks assess the risk to Indonesia before agreeing to participate in a syndicate with Indonesian state-owned banks? The risk assessment will also be influenced by the analysis of the three global rating agencies regarding Indonesia’s sovereign debt outlook and rating.
If the government issues special debt securities for weapons to be purchased by Danantara and/or state-owned banks, will such securities be tradable? For instance, if a state-owned bank requires liquidity, can it sell those debt securities? If these securities are not tradable for liquidity purposes, then the matter…