JAKARTA, KOMPAS — The government expects the risk of government debt financing to increase at the end of the first half of 2021 in line with the potential for foreign capital outflows and the weakening of the rupiah exchange rate. These two risk factors emerged, among other things, because of the policies of the United States government in restoring the country\'s economy.
In a report titled Debt Portfolio Review Quarter I-2021 received by Kompas on Wednesday (19/5/2021), Director General of Financing and Risk Management of the Finance Ministry Luky Alfirman said the government would look at macroeconomic and financing risks, which tended to increase in the context of debt issuance in the April-June period in 2021.
Factors taken into consideration included the faster economic recovery in the US, geopolitical tension in line with the possibility of a continuing tariff war between the US and China, and the risk of delaying the delivery of the AstraZeneca vaccine in several countries.
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The US economic recovery program, according to Luky, will have an impact on increasing yields of US securities. This will encourage the strengthening of the US dollar exchange rate and put pressure on the financial sectors of developing countries, including Indonesia.
The tariff war between the US and China could trigger political instability. "Meanwhile, postponement of vaccinations could slow down the economic recovery," said Luky in the report.
With all these considerations, the government plans to issue Rp 323.4 trillion in debt in the second quarter of 2021. This amount consists of state debt securities of Rp 194.6 trillion, state sharia securities of Rp 108.4 trillion, and cash loans of Rp 20.4 trillion.
Postponement of vaccinations could slow down the economic recovery.
Meanwhile, the government’s net debt issuance during the first quarter of 2021 reached Rp 334.77 trillion, or 27.7 percent of the net debt target of Rp 1,207.6 trillion for 2021. This debt came from government securities (SBN) amounting to Rp 337.2 trillion and cash loans worth Rp 2.5 trillion.
Mitigation
To mitigate increasing macroeconomic risk in general and the risk of debt financing in particular, the Finance Ministry will seek to deepen the domestic financial market and coordinate its policies closely with Bank Indonesia (BI) to safeguard foreign exchange reserves.
The government, according to Luky, will also take steps to manage liability assets through debt switching and buybacks. In addition, the Finance Ministry will maximize the issuance of state securities in the second half of the year.
"The government will take advantage of BI\'s support as a standby buyer to obtain efficient financing and coordinate with loan creditors," he said.
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In total, the Finance Ministry noted that the government\'s debt position until the end of March 2021 reached Rp 6,445.07 trillion. This figure is equivalent to 41.64 percent of Indonesia\'s gross domestic product (GDP) and marks an increase of 1.3 percent from Rp 6,361 trillion in the previous month.
The increase in debt was attributed in part to the state of the Indonesian economy, which is still in a recovery phase after contracting for several consecutive quarters amid the Covid-19 pandemic.
Alarm
An economist at the Institute for Development of Economics and Finance (Indef), Bhima Yudhistira, contended that, even though the ratio of government debt to GDP was still below 60 percent, the increase in debt every month was alarming in that the debt ratio continued to creep up and was at risk of breaking the limit.
Law No. 17 of 2003 on State Finances states that the budget deficit is capped at 3 percent of GDP and that the total outstanding debt is limited to a maximum of 60 percent of GDP. Meanwhile, Government Regulation in Lieu of Law (Perppu) No. 1 of 2020, which was later stipulated as Law No. 1 of 2020, allows the budget deficit to exceed 3 percent of GDP in the period of 2020-2022. However, in fiscal year 2023, the deficit may no longer exceed 3 percent of GDP.
"Until the end of this year, if fiscal management does not change, it is not impossible that the debt-to-GDP ratio will reach 50 percent. The government says the debt will be used to deal with the pandemic. In fact, from the central shopping post, debt is also used for personnel and goods spending,” said Bhima.
If government spending continues as usual, it will be difficult to control the increase in debt in the future.
According to him, government debt should be used more for the productive sector, so that loans can contribute more to boosting the economy. The government has been urged to recalculate expenditure requirements and cut unnecessary spending needs this year.
Meanwhile, the executive director of the Center of Reform on Economics, Mohammad Faisal, said controlling spending was important, because the government had a responsibility to push the budget deficit back down to below 3 percent of GDP in 2023.
In 2020, the realized state budget deficit reached 6.09 percent of GDP.
Meanwhile, the projected upper limits for the deficit in 2021 and 2022 are 5.69 percent and 4.85 percent, respectively. "If government spending continues as usual, it will be difficult to control the increase in debt in the future," he said.
This article was translated by Hyginus Hardoyo.
