8/8/2019 07 March - External Debt

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Eye on The Economy

16 Globe Asia | M A R C H 2 0 0 7

growth in recent years suggest that external debt would slow growthonly after its face value reaches a threshold level estimated to beabout 50% of GDP, or in net present value terms, 2025% of GDP.In the case of Indonesia, Danareksas Sumual suggests a safe level oforeign debt at 15% of GDP at net present value.

There would be no significant changes to Indonesias foreign debttrend unless the plan to cut external financing up to 50%, as stated by the Minister of National Development Planning, is really going to beimplemented, says the analyst. But the debt repayment figure of $20billion in four years is still a big number ($5 billion a year is close to

what the CGI offered). In the next four years the external debt trend will remain high. Indonesias debt position basically has not reached

its long-term sustainable level, Sumual concludes.The IMF debt repayment and the decision to end ties withthe CGI simply point toward the resolve of the gov-ernment to gain full independence in the decision-making process. Indirectly, it is a statement aimed atencouraging growth through investment rather thandebt. However, efforts to improve the investment cli-mate are still lackluster.

Realization of domestic investment fell fromRp30.7 trillion in 2005 to Rp20.8 trillion in 2006.Foreign investment realization dropped 32.9% from$8.9 billion in 2005 to $5.9 billion in 2006. After

four years, the plan to develop a one-stop investmentcenter has not been accomplished while some crucialeconomic regulations including the investment law,the labor law and the tax law remain incomplete.

There is also no clear resultconcerning the plan to developSpecial Economic Zones in Ba-tam and Riau islands to attractinvestors, particularly from Sin-gapore. It seems that the gov-ernment must walk the extramile needed to address clich

problems related to investmentclimate improving. All in all, despite the re-

maining challenges, growth is picking up. Sanjeev Sanyal, senioeconomist of Global Markets Research at Deutsche Bank in a re-cent analysis came to the bold conclusion that from the perspectiveof macroeconomic stability, Indonesia has finally recovered fromthe Asian Crisis.

The big challenge, however, remains how to ensure that im-provements in macroeconomic stability work their way into tan-gible progress in the real sector, in order to reduce high levels ofunemployment and poverty.

ollowing the settlement of Indonesias remainingdebts to the International Monetary Fund (IMF) of $7.8 billion four years ahead of schedule in Octoberlast year, the government made what most consider tobe another courageous move in dissolving the Con-sultative Group on Indonesia (CGI), Indonesias larg-

est group of creditors.The CGI, which consists of 32 multilateral and bilateral credi-

tors, has been lending to the country since 1992. The CGI was initself a new name for the Inter-Governmental Group on Indonesia(IGGI), established in 1967 by the Netherlands, to coordinate mul-tilateral aid for Indonesia.

In line with the monumental decision to scrap the CGI, Indo-nesia has also improved its ranking in the World Economic ForumsGlobal CompetitivenessIndex, moving up to 50thplace in 2006 from 69thin 2005. Other confir-mation of progress alsocame from internationalrating agencies Fitch EndMoodys which in its re-cent revisions pushed theoutlook of Indonesias BB

minus sovereign rating topositive from stable.The broadest measure

of the impact of debt isthe ratio of public debt tototal economic output orGDP. Overall, there has been a downward trendof Indonesias ratio of government debt to GDPin the last seven years, from 89% in 2000 to43% percent in 2006. And, promised PresidentSusilo Bambang Yudhoyono in his New Yearspeech, we will continue to reduce the level to

35% this year. Analysts agree the picture is improving.There is also an improvement in capacity topay with total external debt service to export ratio (DSR) decreas-ing from 261% in 1998 to lower than 100% in 2006 due to a sig-nificant rise in exports, said David E. Sumual, analyst at DanareksaResearch Institute.

Apart from the IMF debts, the government last year also paid$5.99 billion on debt principal and $2.88 billion on interest. In-donesias overseas debts totaled $132 billion in early 2006, around40% of GDP, slightly down from $133 billion a year earlier,

Studies on the relationship between external debt and economic

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1020

3040506070

2000 200620052004200320022001

8090

Debt to GDP Ratio

EXTERNAL DEBT:IMPROVEMENT AND CHALLENGES

By Rahmat Herutomo

Government Debt Composition

53.7%

DomesticDebt

46.3%

ExternalDebt

BilateralExport CreditADBIBROOther MultirateralOthers

23.7%

9.0%

6.5%

5.8%

1.1%

0.2%

89.0

74.965.8

60.4 56.9

47.641.3

Source: Ministry of Finance

Source: World Bank

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