Susilo Bambang Yudhoyono (SBY) campaign team always boasted economic achievement during SBY led administration which successfuly reduce foreign debt including paid remaining $ 7.8 billion debt from International Monetary Fund (IMF). In SBY administration, foreign debt was massively replaced by domestic debt by issuing government bond either in rupiah or in foreign currency such as US dollar or Japanese Yen (samurai bond).
They acknowledged the total debt was grew, but they assure it was secure as the debt to GDP (gross domestic product) ratio was significantly smaller than in previous years. In 2004, the first year of SBY administration, the debt to GDP ratio was still 57 pct and in 2008 reduced to 33 pct.
National Development Planning Agency (Bappenas) officers when asked about why we compare government debt to GDP, they will always tell that it was a custom around the world. They just followed the so called global standard.
What is GDP? Because google is our best friends, I took it from wikipedia:
a basic measure of an economy’s economic performance, is the market value of all final goods and services made within the borders of a nation in a year.  GDP can be defined in three ways, all of which are conceptually identical. First, it is equal to the total expenditures for all final goods and services produced within the country in a stipulated period of time (usually a 365-day year). Second, it is equal to the sum of the value added at every stage of production (the intermediate stages) by all the industries within a country, plus taxes less subsidies on products, in the period. Third, it is equal to the sum of the income generated by production in the country in the period—that is, compensation of employees, taxes on production and imports less subsidies, and gross operating surplus (or profits).
Briefly, GDP describe all economic activities in a country, regardless if there are activities funded by foreign investment which may provide huge contribution to GDP such as mining, oil and gas industries run by foreign multinational company. All economic activitiees were counted and summed. If we put the foreign factor aside, we will have Gross National Product (GNP), a term rarely quoted in seminars or paper on economic issue.
If you run a company, usually debt will be compared to EBITDA (earning before interest, tax, amortisation, and depreciation). I don’t know what in the hell EBITDA was, but it was used to compare profitability between companies in the same sector or industry. On the company financial report, EBITDA put between gross profit and earning (net profit). It can tell you how good a company can pay their debt. The lesser debt/EBITDA, the better a company. Some use term such debt to asset ratio, but I think it solely just to make sure that the bank can get their money back when the company defaulted and must sell their asset to pay the debt back.
According to Indonesian Central Statistic Bureau (BPS), Indonesian GDP in 2008 was around Rp 4,990 trillion (US$ 490 bio) or US$ 2,000 per capita. Govt debt was Rp 1,667 trillion consist of foreign debt Rp 732 trillion and govt bond Rp 968 trillion. In 2004, total govt debt still Rp 1,299 trillion. In 2008 RI govt must pay debt installment and the interest up to Rp 107 trillion compared to Rp 62.5 trillion in 2004. Whereas RI annual budget in 2009 nearly reach Rp 1,000 trillion, almost twice 2004 budget for Rp 450 trillion.
So, where we can put the govt debt to GDP ratio?
If you insist me to compare a budget management of a country to a company, you only make me nervous because as far as I know the so called Govt Inc never make any profit. But if you persist, I will put EBITDA under govt revenue from tax levied, dividend from state owned enterprises, and from other levies. That means, it will fall under the annual budget which currently near Rp 1,000 trillion as the govt budget always deficit.
Again, I confused as why our government always compare budget deficit to GDP. In 2009, govt budget is around 2.5 pct of GDP. Looks small isn’it? But that means Rp 130 trillion or 13 pct of Rp 1,000 trillion of 2009 budget. The deficit must fill in with another fresh debt, not with a dead cow!!
What is the connection between budget deficit with GDP? Because we used to compared debt with GDP, so we also compare budget deficit that actually a new debt to GDP. This is how the holy damned economic system works.
But GDP don’t give us any clear picture of the capability of a govt to repay its debt. But as GDP means total wealth of a nation belongs to private sectors, individuals, and govt itself, so it was the wealth ready to be confiscated by govt as necessary to repay the mounting debt. How can govt do that? Yes, they already armed. And most importantly, the wealth we hold valued or maybe wholly represented by a mere paper money signed by the central bank governor. The ruler of the nation decide the value of our wealth. If all the govt structure collapsed, then there no longer any guarantor and guardian to the value of our paper money. Central bank governor’s signature on the rupiah bill wil no longer trusted, respected and valued.
GDP also represent total spending of economy which need adequate money supply to serve the economic activities. So, GDP also represent flow of money. We can see for five years (2004-2008) Indonesia GDP grew about 4-6 pct annualy, but inflation still hike in a mean rate of 9.5 pct. It means, the Indonesian real wealth undergo a minus growth (GDP growth minus inflation). Our wealth is growing but the recent purchase power is lesser than in the previous year, or maybe the economic growth just dominated by the growth of money supply?
Indonesia central bank (BI) release two kind of data for GDP. One is measured by current price and the latter by constant price of year 2000. Compare the two GDP model we can have inflation rate between the real GDP and the nominal GDP refer to the price of 2000.
Please, have a look to this link in Bahasa:
From BI website:
With current price, GDP in 2008 about Rp 4,458 trillion and in the first quarter of 2009 about Rp 1,127 trillion.
With constant price of year 2000, GDP in 2008 only Rp 1,848 trillion and GDP on first quarter 2009 about Rp 1,795 trillion. For the whole 2009, we can multiply by four so we have GDP 2009 is Rp 1,795 trillion. Whereas GDP in 2000 with current price about Rp 1,265 trillion.
I will not compare data of current govt debt of Rp 1,667 trillion with real GDP 2009 (with constant price of 2000) which only Rp 1,795 trillion. It will make enormous debt to GDP ratio to more than 89 pct. But that is not fair since our debt value measured by constant price of year 2000 also diminished.
Comparing GDP from 2000 until 2009 by current price, our wealth within 10 years has been multiplied by 3,75 times or grow up to 275 pct. But when compare with constant price of 2000, our real wealth within 10 years only grow 41 pct.
I will make a foolish comparison. Govt debt in 2000 was around US$ 130 bio (Rp 1,050 trillion with exchange rate US$ 1 = Rp 8,000) and in 2009 around Rp 1,667 trillion with current price respectively. So, they grew around 58 pct within 10 years. Govt debt to GDP ratio in 2000 was around 83 pct. They said that in 2009 govt debt to GDP ratio was around 32 pct. But in 10 years we have debt hike rate 58 pct compare to GDP growth rate 41 pct.
Economist who defend SBY-Boediono such Chatib Basri (lecturer in UI and advisor to ministry of finance) always said such excuse like these: ”Govt debt is grow, but that was normal since our wealth (GDP) also growing.”
Inflation is very much loved by debtor but hated by creditor. Let say you were employee in a state owned company start working in year 2000 with monthly salary around Rp 4 million. You took mortgage Rp 150 million for 15 years with fixed interest rate of 8 pct. You pay installment Rp 1,46 million a month for 15 years (BTN mortgage simulation). After 10 years, now your salary has risen up to Rp 15 million with mortgage installment still Rp 1,46 million and you still have to pay for more five years forward. But with annual inflation rate around 7-19 pct, your mortgage installment value actually diminished but your property price is unchanged compare to the constant price of 2000. If you compare the property price within 10 years you’ll find an extreme growth but that was not real price. But compare to your mortgage installment you are still the lucky one, and your bank is a looser.
Govt always combatting inflation in Indonesia which consider too high. The ideal inflation rate, according to Indonesia finance minister Sri Mulyani expected to be around 3-5 pct just like in the developed countries so it will lead bank interest in low level. Inflation is enemy but also loved for an indication that there were economic growth although there always a pseudo growth due to growth in money supply. Inflation is a tools which enable govt secretly steal our wealth by pumping the money flow.
Talk about inflation, there are so many causes either foreign or domestic factors. I remember when I bought fried snack (Bahasa: gorengan) last week. I stunned when I give the seller Rp 4,000 and he only gave me six little pieces of gorengan. I notice this situation has lasted for more than a year since early 2008 when CPO price soar high up to US$ 1,200 a ton. It drove the palm oil price gone high above Rp 10,000 a liter and followed by palm oil scarcity in the market.
There were violation on domestic market obligation (DMO). The higher price in foreign market has lured some palm oil producer to export CPO illegally. Indonesia is the biggest CPO producer with annual production up to 20 million tones. The domestic demand only 4.5 million tones while 13-14 million tones were exported. So there were around 2-3 million tones which cannot be traced.
Now the CPO price has gone down to the level of US$ 500-700 a ton (around US$ 650 a tone in Malaysia CPO bourse). But in Carrefour hypermarket website I still found the price of palm oil still persisted around Rp 11,000 a liter. My friend in Kuala Lumpur told me gorengan in Malaysia is more expensive as you can only get three pieces for 1 RM (Rp 2,800). But palm oil price in Kuala Lumpur is only around Rp 6,500 a liter. Malaysia was second to Indonesia in CPO production but they can maintain palm oil price lower than we are. So, in the case of inflation on gorengan price I notice the dominant factor is incapable govt.
The bottom line is, there is no actual sensible reason to compare govt debt to the respective national GDP. And govt always ignorance about the real wealth when they talk about fiction GDP numbers. When a govt realize that their debt is still in a reasonable mount compare to GDP, it will lead to a justification that it is okay to add more debt because a controlled debt is good for development and business. It will lured to a new debt as the most practical way to solve budget deficit. ”It is OK to borrow some more because the debt to GDP ratio still secure.”
So, it will hard to see a creative govt who can make a breakthrough for not always being depended on debt, either from foreign or domestic source. Economic development can be done without debt if we can shift our paradigm. Govt will no longer deeply involved in any big project such electricity or infrastructure. Just let the state owned enterprise to deal with as Indonesia’s banks still have great capabilities to provide fund –which is cheaper than any govt bond– for any project as long as there is a govt guarantee. There are still great amount of public money that just being kept in banking system due to moderate loan to deposit ratio policy. Indonesian big banker just put the idle fund on central bank certificate (SBI) and they enjoy the interest paid by tax payers.
Benjamin Disraeli (1884-1881) once said (and quoted by Mark Twain):
There are three kind of lies: Lies, Damned Lies and Statistic !!!