PERPETUUM MOBILE (mrc)
Watching Indonesia’s External Debt
By Gundy Cahyadi on 08:21 pm Nov 02, 2014
Rupiah notes are lined up beside US dollar notes. (Antara Photo/Puspa Perwitasari)
Financial market stability is a key priority for Bank Indonesia this year. One policy the central bank has consistently pursued has been the accumulation of foreign reserves.
Reserves are up by $12 billion year-to-date, compared to $ 14 billion of portfolio inflows over the same period. Indonesia’s foreign reserves-external debt ratios are among the lowest in Asia, and although foreign reserves are still twice the size of short-term — 1 year or less — external debt, sharp moves in capital flow will continue to be problematic going into 2015.
Against this backdrop, it is not surprising for Bank Indonesia to pursue greater stocks of reserves. Similarly, the bank would also want to check on the current pace of external debt growth. In the days before President Joko Widodo was inaugurated on Oct. 20, the central bank met with Yudhoyono’s outgoing economic team to establish policy coordination to safeguard macroeconomic stability going into 2015.
Four key tasks emerged: to control inflation, narrow the current-account deficit, maintain fiscal sustainability and manage external debt growth.
External debt growth is perhaps a more complicated challenge, particularly in the long run. In August, outstanding external debt reached $290 billion, 11.2 percent higher than a year earlier. Some 55 percent of the debt is owed by the private sector.
External debt is not necessarily bad if it is financing productive investment projects. The problem is investment growth has fallen sharply in recent years and it will likely be negative again this year, despite growth in private sector external debt. One reason is that most of the increase in external debt has accrued to the financial services sector, rather than to manufacturing or transport and communication where, most agree, new investment is needed.
New rules on corporate foreign currency debt issuance are also forthcoming. As a backdrop to these efforts, one should expect Bank Indonesia to maintain a bias for tight monetary policy. In addition to pursuing further reserve buildup, a tight policy bias will safeguard against inflationary pressure stemming from a weak rupiah.
Gundy Cahyadi is a Singapore-based economist for DBS Group Research
Rupiah notes are lined up beside US dollar notes. (Antara Photo/Puspa Perwitasari)
Financial market stability is a key priority for Bank Indonesia this year. One policy the central bank has consistently pursued has been the accumulation of foreign reserves.
Reserves are up by $12 billion year-to-date, compared to $ 14 billion of portfolio inflows over the same period. Indonesia’s foreign reserves-external debt ratios are among the lowest in Asia, and although foreign reserves are still twice the size of short-term — 1 year or less — external debt, sharp moves in capital flow will continue to be problematic going into 2015.
Against this backdrop, it is not surprising for Bank Indonesia to pursue greater stocks of reserves. Similarly, the bank would also want to check on the current pace of external debt growth. In the days before President Joko Widodo was inaugurated on Oct. 20, the central bank met with Yudhoyono’s outgoing economic team to establish policy coordination to safeguard macroeconomic stability going into 2015.
Four key tasks emerged: to control inflation, narrow the current-account deficit, maintain fiscal sustainability and manage external debt growth.
External debt growth is perhaps a more complicated challenge, particularly in the long run. In August, outstanding external debt reached $290 billion, 11.2 percent higher than a year earlier. Some 55 percent of the debt is owed by the private sector.
External debt is not necessarily bad if it is financing productive investment projects. The problem is investment growth has fallen sharply in recent years and it will likely be negative again this year, despite growth in private sector external debt. One reason is that most of the increase in external debt has accrued to the financial services sector, rather than to manufacturing or transport and communication where, most agree, new investment is needed.
New rules on corporate foreign currency debt issuance are also forthcoming. As a backdrop to these efforts, one should expect Bank Indonesia to maintain a bias for tight monetary policy. In addition to pursuing further reserve buildup, a tight policy bias will safeguard against inflationary pressure stemming from a weak rupiah.
Gundy Cahyadi is a Singapore-based economist for DBS Group Research
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