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Indonesia’s government bonds to fight off COVID-19 will burden future generations

mikecohen/flickr, CC BY-SA

Countries around the world are struggling to finance the battle with the COVID-19 pandemic, which has also hurt their economies.

This includes Indonesia, which has decided to issue government bonds to finance a stimulus package to counter the impacts of COVID-19.

There are actually two options to fund the stimulus: taxation or loans. But taxation can’t provide a huge amount of cash in a short time, so the government is issuing the first 50-year dollar bond sale by an Asian country. Worth US$1 billion, the 50-year bond issue is part of the US$4.3 billion multi-part debt offering.

A government bond is simply a kind of loan from investors to a government. The government promises to pay the buyer small cash payments, called coupons, which are set at a fixed rate until the bond matures.

Due to the long-term nature of this debt, I argue that the debt will create a burden for the next generation. And, if not well managed, it can create a debt crisis in the future.

Nevertheless, there should be forward thinking about containing the COVID-19 disruptions to the economy and funding solutions.

cafecredit/flickr, CC BY

How the debt will be bad for future generations

The government’s recent bonds will be burdensome for Indonesia’s future generations for at least two reasons.

1. It is a very long-term bond

The duration of the Indonesian government bond is ten times that of the recently launched Australian government bond, which has a maturity of less than five years.

A consequence of this long term is that it’s a moderate-to-high-risk bond and will likely be affected by interest rates.

The price of the bonds will be affected by the interest rates set up by central banks, especially the US Federal Reserve.

In a recession, like the current situation, the Federal Reserve sets a relatively low interest rate, making an investment in bonds more attractive. But, in a normal situation, the Federal Reserve may set a higher interest rate.

Therefore, bonds with a 50-year maturity will create uncertainty for bonds whose values are affected by the Federal Reserve’s interest rates.

2. It is in foreign currency

The Indonesian government bond is using the US dollar. Given that the Indonesian rupiah is weak against the US dollar, there is likely a high currency-related risk. The fluctuation of the rupiah will influence the value of the loans the government has to repay in the future.

The majority of Indonesian government bond buyers are global investors, particularly from Europe and Singapore.

Paying interest and repaying the debt will be more challenging with global investors than with local investors if the government is not be able to repay the debt due to foreign currency risk and the weakness of rupiah compared to US dollars.

Misleading numbers

The Ministry of Finance justifies this long-term sovereign bond because Indonesia has low ratio of debt to gross domestic product at 30.2%.

That figure is much lower than for many other countries in the world such as Malaysia (52.5%) or the United Kingdom (80%).

This ratio is the gross debt of the government as a percentage of gross domestic product, according to the Organisation for Economic Co-operation and Development. When government debt is high relative to gross domestic product, this indicates a country will have to pay back the debt through creating another debt.

Adding more bonds will contribute to the increase in the government deficit from 3% to 5% of Indonesia’s GDP. As a percentage, the deficit looks small, but in terms of the amount it’s a huge number as it could reach up to US$61.5 billion (equal to Rp 1 quadrillion) this year. That’s a jump of 286% from the initial target of Rp 351.9 billion.

This huge number will be a burden for Indonesian generations 50 years from now.

At the end of the day, taxpayers will pay for the stimulus package. That’s you, your children, or even your grandchildren.

On top of that, systemic corruption in local government in many provinces is another challenge to making sure the money goes to the right recipients.

A better strategy to repay sovereign long-term debt

There are several ways to manage the large burden of government debt due to COVID-19.

First, the Ministry of Finance with the Financial Services Authority and Bank Indonesia should propose a strategy to repay the debt within 10-15 years.

The current situation is forcing governments around the world to borrow money through issuing debt recklessly. Therefore, governments will have to collaborate to repay the debt before it creates future disasters to the economy in the long term.

Second,transparency is essential.

Ideally, every month the Ministry of Finance, Ministry of Health and local government should report on the spending of every penny from the debt to the public.

For instance, Germany can manage COVID-19 better than other European countries due to collaboration between its ministries.

Third, the government should raise taxes for the richest group in Indonesia. This would be similar to developed countries such as France, which is able to generate tax revenue equal to 46.2% of its economic output.

The Indonesian government is quite lenient with the rich. Indonesian millionaires account for only 0.1% of the population but hold half of Indonesia’s wealth.

The burden of repaying the debt should be shifted more to this group.

Fourth, we should not spend all the funds from the debt on medical equipment and dampening the effects of the pandemic on the economy.

President Joko “Jokowi” Widodo should allocate at least 20% of the budget to build health factories producing ventilators, respirators and other health infrastructure.

It will also help to ask local manufacturers to collaborate with the government.

The procurement of medical equipment is very important, as we will be battling the virus until 2022, plus there is no certainty on when a vaccine will be found.

We need to prioritise tackling the health crisis first over the economy.

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