Debt Burden Rises, Economists Warn of Fiscal Dominance Risk

Head of Economist Bank Permata Josua Pardede (Right) (Aris Nurjani/VOI)

JAKARTA - Bank Permata Chief Economist Josua Pardede reminded of the potential for fiscal dominance as the government's debt interest burden increases and the tax to gross domestic product (tax to GDP ratio) is still low compared to similar countries.

According to him, this situation can make the domestic financial market more sensitive to foreign capital flows and fluctuations in the rupiah exchange rate.

Josua said that fiscal pressure and the increasing need for the issuance of Government Securities (SBN) made Indonesia still very dependent on foreign funds to maintain the stability of the financial market while financing the current account deficit.

Therefore, he added that global investors' confidence in Indonesia's fiscal credibility is an important factor, especially when global sentiment worsens and the risk of capital outflow increases.

"Foreign flows are still needed because structurally the current account deficit must be financed by a surplus in the financial account (current account)," in a Journalist Training in Makassar, quoted Sunday, May 24.

He explained that the narrowing of fiscal space due to the increase in the burden of interest on debt could encourage the government to maintain interest rates stable so that the cost of debt payments does not swell, and in economic theory, this condition is known as fiscal dominance.

"At a time when the government's interest burden increases, there is a tendency for the government to hope that interest rates are relatively stable so that this interest burden does not continue to increase," he said.

Josua assessed that the indication began to be seen when Finance Minister Purbaya Yudhi Sadewa activated the Bond Stabilization Fund to stabilize the SBN market and keep yields under control amid foreign capital outflows which also pressured the rupiah.

According to him, the condition of fiscal dominance is a concern for foreign investors and international rating agencies because it affects the perception of risk of domestic financial assets, including SBN and the rupiah currency.

He emphasized that if investors see that fiscal space is increasingly limited while government financing needs continue to increase, then the potential for foreign funds to exit the domestic market will be greater and can suppress the rupiah exchange rate.

According to him, the participation of foreign investors is still very needed to maintain the balance of the balance of payments and support external stability.

"So we can't turn a blind eye to foreign investors because they are still important for financing our financial markets," he explained.

Furthermore, Josua said that investors' attention at present is not only focused on the state budget deficit, which is still maintained below 3 percent of GDP, but also on the quality of state revenues, which are considered not optimal.

He highlighted Indonesia's tax to GDP ratio, which is at the level of 13.3 percent of GDP, is still lower than that of some peer countries such as the Philippines at 14.8 percent, India at 17.7 percent, and Vietnam at 19 percent.

"What the rating agency sees is that our tax to GDP is still low. Our revenue capacity is not yet optimal to support very large spending," he explained.

On the other hand, Josua understands the government's steps to accelerate the realization of state spending or front loading the budget to maintain the momentum of economic growth.

However, he assessed that the market would still pay attention to whether the acceleration of spending was able to provide a productive and sustainable impact on the economy.

"If spending is productive and can drive the economy, it is certainly good because the GDP is growing," he said.

In addition, he also assessed the dependence on government debt denominated in US dollars is still a challenge for rupiah stability.

Josua said that the government began diversifying the issuance of global bonds through instruments such as dimsum bonds, kangaroo bonds, to the panda bond plan to reduce dependence on US dollar financing while expanding the global investor base.