Indonesia's public debt situation looks safe and manageable. With the nation's GDP at IDR 11,540 trillion (approx. USD $868 billion) at the end of 2015 and total public debt at IDR 3,196.6 trillion (approx. USD $240 billion) Indonesia has a public debt-to-GDP ratio of 27 percent. This figure is well below the lawfully maximum allowed ratio of 60 percent (since the Asian Financial Crisis rocked Indonesia's financial system in the late 1990s the country has been conducting prudent fiscal management).

About USD $143 billion of Indonesia's public debt is foreign debt. The nation's largest creditors being the World Bank, Japan and the Asian Development Bank (ADB). Regarding domestic debt - in the form of bonds (IDR 1,517 trillion) - about 39 percent is in the hands of foreign investors. This rather large chunk of Indonesia's debt paper being in foreign hands makes the country vulnerable to global shocks. In times of global shocks global investors are usually quick to dump riskier (yet higher yielding) emerging market assets.

Scenaider Siahaan, ‎Risk Manager at Indonesia's Ministry of Finance, says Indonesia's debt situation is safe and highly manageable. However, he also informed that the Indonesian government may issue new debt paper this year in a bid to finance the state budget as tax revenue is expected to be much lower-than-expected (particularly after deliberations on the Tax Amnesty Bill were postponed by Indonesia's House of Representatives). In 2016 Indonesia's budget deficit is targeted at 2.15 percent of GDP. However, given weak tax revenue and the looming issuance of more debt paper, this ratio is expected to rise (closer to the maximum 3 percent of GDP cap that is stipulated by a 2003 law). Besides bonds, the state budget will also be financed through foreign loans and the accumulated Budget Surplus (in Indonesian: Sisa Anggaran Lebih). Up to 4 April 2016 the Indonesian government has issued IDR 262.4 trillion of bonds, or 47 percent of the full-year target.

Although there exists a negative connotation regarding debt, it can actually be a very useful tool for the benefit of the wider economy. When debt is used for structural investment that generates future revenue streams, then (prudent) debt-creation is a good monetary strategy. As such, the public debt-to-GDP ratio is an important indicator as it informs to what extent the country is capable of meeting its debt obligations. But, on the other hand, a high ratio (for example above 100 percent of GDP) does not necessarily imply an economy is in trouble. It all depends on how debt is used. Before Indonesian President Joko Widodo, who was inaugurated as Indonesia's seventh president in late 2014, largely scrapped fuel subsidies in 2015 the government used a large chunk of debt to finance fuel consumption. This was an example of wrong utilization of public debt that brings few long-term benefits.

Debt-to-GDP Ratio of Selected Countries:

Country Debt-to-GDP
Indonesia        27%
Turkey        32%
Philippines        36%
Australia        36%
Thailand        44%
Malaysia        56%
Brazil        70%
United States       105%
Italy       133%
Japan       246%

Source: Investor Daily

Carmelita Hartoto, Chairwoman of the Indonesian National Shipowners Association (INSA), said still not all debt is currently being used effectively by the Indonesian government. Part of debt is used for routine expenditures such as officials' salaries that will not bring a multiplier effect. When debt is used for consumption only (implying no, or few, new future revenue streams) then the wider economy will not feel the positive impact and what remains is the debt obligation.

Indef Economist Eko Listiyanto emphasizes the importance for the government to optimize the utilization of debt especially for productive investment in infrastructure (which causes a multiplier effect in the economy and reduces the country's notoriously high logistics costs hence improving the investment and business climate). Listiyanto added that it would be better for the government to raise the portion of domestic debt through bonds rather than seeking multilateral or bilateral foreign loans (to avoid creditors being able to dictate what the loan is used for).

Macroeconomic Indicators of Indonesia:

    2011   2012   2013   2014   2015
Gross Domestic Product¹
  (annual percent change)
   6.2    6.0    5.6    5.0    4.8
Gross Domestic Product
  (in IDR trillion)
 7,832  8,616  9,525 10,543 11,541
• Public Debt
  (percent of GDP)
   23    23    25    25    27
Current Account Balance 
(percent of GDP)
   0.2   -2.8   -3.3   -3.1   -2.1
• Foreign Exchange Reserves
  (in billion USD)
 110.1  112.8   99.4  111.9  105.9

¹ Statistics Indonesia (BPS) shifted the basis of the computation from the year 2000 to 2010 and adopted a significantly updated methodology, hence GDP growth results between 2010 and 2014 have been revised in early 2015
Sources: World Bank, Statistics Indonesia, Bank Indonesia and International Monetary Fund (IMF)

Economist Fadhil Hasan also stressed the importance of using debt to finance infrastructure development across the archipelago. However, despite Indonesia's modest public debt-to-GDP ratio, he says it would be better if the government can curtail debt in order to avoid future shocks. It would be better for the government not to be addicted to debt but focus on raising tax revenues (Indonesia currently still has one of the world's lowest tax-to-GDP ratios).

Meanwhile, Kenta Institute Economist Eric Sugandi expects Indonesia's budget deficit to rise to 2.55 percent of GDP in 2016. He is not so much concerned about government debt. What is more worrying is Indonesia's private sector debt (which currently stands around USD $165 billion).