Can Indonesia pay her debt?

Too high to afford?

May 22, 2025

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Although we are not macroeconomics experts, we do take a look at macro once in a while as a pulse check to see how the economy is doing at a glance. We don’t attempt to predict what is Indonesia’s growth rate going to be. And we don’t attempt to predict if Indonesia is going to be entering a recession. Our questions tend to be more contextual and less broad:

“Can Indonesia pay her debt?”

Let’s take a look!

Following Jokowi’s expansive administration, we saw that there is an increase in debt levels all around. Interest payment ratio to government revenue stands at 17.9% as of 2024. This has an 8% compounded annual growth rate for the past 10 years covered in more details in this article. Now the bigger issue is the following:

Rp 800T of is due around 2025 - 2027

That is a massive massive amount of money. To put it into perspective, that is around 30% of our state revenue excluding interest payments that are supposed to be paid per year. To give it another perspective, this is a debt level that is due with a ratio to state revenue that is highest since year 2000. To give a little bit of numbers (rounded off and massaged to keep it simple):

Per the table above we see that on average, the ratio between debt that is due to state revenue is less than 20%. Now in 2025, it stands at 28% which is considerably higher. This is note worthy because:

Investors need some level of assurance that a country is not going to default on their debt
But there is a pattern that this country keeps on increasing its debt levels, and interest payment as a consequence

For example, let’s say we have Alex who’s job is a consultant. His income rises steadily for example at a 5% annual rate. However, his debt rises even faster than his income, let’s say 8% per year. If you are Alex, how would you be able to justify your lender next time that you will be able to repay your debt if:

your increase income is less than your increase in debt levels

Chances are, you might be the debtor would want a higher interest rate overtime as Alex is deemed riskier and riskier. These risk are:

Default
Refinancing the loan (gali lubang tutup lubang), but with a much higher and more unsustainable interest rates. Therefore, more proportion of budget will be allocated to non-productive matters such as interest payment in future.

So let’s take a look at why the debt was huge at the first place

We think that simple answer is because of COVID. Yes, although activities nowadays have resumed to normal and we have seen corporate earnings of public companies in Indonesia recovering or even producing all time high earnings, government still needs time to deal with financial decisions that was made during the COVID era. Particularly surrounding increased loans through issuance of Rp 449 trillion worth of pandemic bonds.

Why that much loans? We could see that budget deficit in 2020 was at 58% and in 2021 was at 39%. At that time, it is very much understandable that the government was forced to take on a loan to cover its state expenses to support economic recovery.

Debt is huge, what is the plan now?

Refinancing through bilateral debt switch. The name might sound confusing but here’s how the mechanism works. Bear in mind that there are 2 entities involved in the operation namely Bank Indonesia and Indonesian Government.

Also note that we might be glossing over some details and the purpose is just to get a big picture of the plan and strategy to manage the short term maturing debt situation.

Bank Indonesia (BI) purchases bonds maturing in 2025 from investors.
Then BI swaps the bonds maturing in 2025 with bonds, maturing at a longer term period, from the Indonesian government

This is a neat solution so that Indonesian government does not have to come up with huge expenditure to service piling debt in 2025.

To illustrate it even more simply, consider the table below:

In a nutshell, the government refinances the old debt with a longer term debt. This causes the sudden outflow of money from the government to be more manageable in the short term. This operation is actually not new and has been done before in the past.

So are we out of the woods?

Although this is an important mechanism to manage maturing short term debt, we view it more of a tactical approach. What we believe that is important for us be able to analyse micro peacefully is a conducive macro environment. Therefore, metrics that we see are:

debt to state revenue
interest rates to state revenue
level of foreign reserves
GDP growth

We covered this quite extensively in the previous blogpost article offering a cautiously optimistic stance on the fundamentals of the country at large.

Closing Remarks

Therefore, while the fundamentals of the country is admittedly not as great as that before the pandemic, we’d rather not take an alarmist view on the matter regarding debt payments. Ok, now back to focusing on micro 🙂

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