Indonesian government plans to reduce foreign debts

The government will gradually reduce Indonesia's share of external debts to minimise overseas dependency and mitigate currency risks, an official at the Finance Ministry has said.

The ministry's debt management office director general, Robert Pakpahan, told The Jakarta Post that the government would cut its foreign debt to 40 per cent of its overall outstanding loans this year, from more than 43 per cent last year.

The composition will be further reduced to 38 per cent next year and 37.3 per cent by 2016, according to an official Finance Ministry document obtained by the Post.

"Our mid-term strategy is to reduce foreign exchange [forex] denominated debts," Robert said in a telephone interview recently. "That's why principal payment has been higher."

As of January this year, the government had outstanding external debts amounting to US$127.9 billion (S$160.3 billion), a slight 1.9 per cent increase from the same period last year at $125.5 billion.

External debts are tailed with currency risks, such as those seen in Indonesia during the 1997-1998 Asian financial crisis when companies headed for defaults as they could not pay back their financial obligations due to a sharp decrease in the rupiah's value.

The rupiah was Asia's worst-performing currency last year, having depreciated by more than 25 per cent against the greenback, but the nation's currency has taken a U-turn this year as it has gained more than 6 per cent thus far.

The government has wanted to bring down its debts with a target to reduce the country's debt-to-GDP (gross domestic product) ratio to 21.8 per cent this year and by 1 percentage point every year until 18.7 per cent in 2016, a Finance Ministry document shows. The ratio measures the amount of loans in comparison with the size of a country's economy.

Destry Damayanti, chief economist at Indonesia's biggest lender, Bank Mandiri, said the government's plan to phase down the composition of foreign debt would potentially bring down yields for forex denominated debt papers or bonds. Yields move in the opposite direction of prices.

"Demand for Indonesia's global bonds have been high, so a lower supply of forex debt papers would make them sought after," she said.

Yields for Indonesia's 10-year forex denominated debt papers stood at 4.846 per cent as of the end of February, while the 20-year global bond yields were at 6.209 per cent, government data shows.

With the government's plan, the supply of rupiah denominated debt papers will increase, but without strong demand, domestic bond yields will also jump. The government's benchmark 10-year bond yields were at 8.33 per cent as of the end of February this year, compared with 8.38 per cent at the end of last year and 5.15 per cent in December 2012.

"This will mean that the government will put more weight on domestic debts," Destry added.

She went on to say that this would unlikely translate to lower global bond issuances in the debt market in the future because Indonesia would still need financing to plug its growing state budget deficit.

Indonesia plans to raise a record Rp 357.96 trillion (S$39.5 billion) in funds from both international and local debt markets this year, between 20 per cent and 25 per cent in forex denominated debt papers and the remaining in rupiah.

The debt management office would ensure that forex denominated debt papers would not exceed 20 per cent of entire bond issuances in the future, according to Robert.