Financial challenges: A woman walks past an electronic board displaying prices at the Jakarta Stock Exchange. Thomas says one of the key tools for debt management is debt conversion, which supports the development of local currency markets. — AP
JAKARTA: Indonesia is looking to strengthen local currency usage in partnership with multilateral development banks (MDBs) amid global economic challenges and to support sustainable development.
Deputy Finance Minister Thomas Djiwandono said one of the key tools for debt management was debt conversion, which supports the development of local currency markets as foreign debt is converted to local currency.
“More importantly, with debt conversion, we can lower our financing costs and minimise financial uncertainty, which in turn provides greater fiscal space to address other pressing needs,” he said during a seminar at the Asian Development Bank’s (ADB) 58th annual meeting in Milan, Italy, on Monday.
“Looking ahead, Indonesia would like to explore further opportunities in partnerships with MDBs for any instruments and mechanisms that could contribute to our local currency,” he said.
Indonesia has used MDB debt conversion mechanisms since 2019 in partnership with the World Bank and ADB.
Many of these conversions involved shifting from floating to fixed interest rates, resulting in loan interest payments reduced to close to 0% and, where appropriate, converting the foreign currency into local currency, thus reducing Indonesia’s foreign exchange liabilities, Thomas said.
He went on to explain that, until 2025, Indonesia and the ADB had completed eight transactions covering 53 individual loans with a total converted amount equivalent to 189 trillion rupiah.
The two latest transactions were in October of last year and March this year, respectively, converting US$1.4bil in eight Japanese yen loans and US$1.86bil in 19 US dollar loans to rupiah.
“When undertaking these conversions, we carefully assess multiple factors, including the benefits of foreign exchange diversification, exchange rate dynamics, market volatility and reference interest rate trends.”
However, the deputy finance minister pointed out that MDBs should play a broader role in supporting their clients to “strike the right balance” between foreign and local currencies in their financing strategies.
“Infrastructure projects and projects involving small and medium enterprises, for example, should not be burdened by foreign-denominated debt and bear the risk of currency mismatches when they generate income in local currency,” he said.
Thomas stressed that local currency market development was critical to reducing dependency on foreign currency funding and thereby enhancing financial resilience and ensuring macroeconomic stability amid global economic and financial challenges.
The government faces significant financial challenges, characterised by high debt financing needs amid increased spending and declining state revenue.
For 2025, the government projects a budget deficit of approximately 616.2 trillion rupiah, or 2.53% of gross domestic product (GDP), requiring 775.9 trillion rupiah in financing.
This financing will be sourced from 642.5 trillion rupiah in bond issuances and 133.3 trillion rupiah in loans, alongside a leftover of 45.4 trillion rupiah from the 2024 budget.
To manage these financing needs, the government has implemented a pre-funding strategy, raising 85.9 trillion rupiah through government bonds ahead of the 2025 financial year.
Additionally, the government and Bank Indonesia have agreed to swap 100 trillion rupiah in Covid-19 bonds due in 2025, aiming to minimise new issuances and manage debt costs effectively.
Despite these measures, the government’s financial position remains under pressure. In the first half of 2024, revenue fell 6.2% compared to the same period in the previous year, primarily due to declining tax revenue.
Yet, the government has decided to increase spending, which is expected to be 2.6 percentage points higher than initially targeted for the full year.
These financial challenges have also impacted investor confidence.
In April 2024, the National Development Planning Agency proposed raising the debt-to-GDP ratio to around 40% to accommodate upcoming programmes promised by the Prabowo administration, raising concerns among experts about potential risks to the overall economy. — The Jakarta Post/ANN
