Indonesia’s Rising Debt Levels Spark Concerns Over Private Sector Credit Crowding Out

JAKARTA, investortrust.id — Wijayanto Samirin, an economist at Paramadina University, has raised alarms over the growing proportion of government securities (SBN) and Bank Indonesia Rupiah Securities (SRBI) held by banks, warning that this trend could stifle private sector credit growth and exacerbate fiscal risks.

“Banks may prefer investing in SRBI and SBN, which offer interest rates above 7% with zero risk, rather than extending loans to the real sector,” Wijayanto said during a virtual discussion titled “A Critical Review of Prabowo's First 100 Days in Economic Governance,” held on Wednesday, January 22, 2025.

His comments come as Indonesia’s government debt continues to swell, driven largely by the issuance of SBN. As of the third quarter of 2024, SBN accounted for 87.7% of total government debt, amounting to Rp 7,483 trillion ($480 billion), while external loans made up just 12.3%, or Rp 1,046 trillion.

“In the past, the ratio was roughly 50-50. Borrowing through SBN is easy, but with loans, you must draft proposals, lobby lenders, and comply with donor oversight,” Wijayanto explained.

To attract investors, the government has steadily raised bond yields over the past decade, a strategy that has significantly increased debt levels. This has led to a growing reliance on SBN, which now dominates the government’s debt portfolio.

Banks’ Growing Appetite for SBN and SRBI

Approximately 75% of SBN is held by financial institutions other than Bank Indonesia (BI), with the remaining 25% held by BI itself. The bonds held by BI serve as the underlying assets for SRBI, which now total Rp 915 trillion and carry an interest rate of 7.23%.

The high yields on SBN and SRBI have not only drawn banks away from lending to the private sector but have also diverted investor interest from the capital market. Instead of equities, investors are increasingly channeling funds into these government-backed securities, further crowding out private investment.

Fiscal Risks and Debt Management Challenges

Wijayanto emphasized the need for prudent debt management, warning that without effective oversight, President Prabowo Subianto’s administration could face significant fiscal constraints. Indonesia’s debt service ratio (DSR), a key indicator of debt sustainability, is projected to reach 45% in 2025 and 44% in 2026, well above the safe threshold of 25%-30%.

“When the DSR becomes excessively high, it’s a clear warning sign. Investors will begin to view our bonds as risky investment products,” Wijayanto cautioned.

The rising DSR reflects the growing burden of debt repayments, which could limit the government’s ability to fund critical infrastructure projects and social programs. This, in turn, could undermine economic growth and investor confidence.

Wijayanto’s remarks highlight the delicate balance the government must strike between financing its fiscal needs and ensuring sustainable economic growth. While SBN and SRBI have provided a reliable source of funding, their dominance in the debt portfolio and their impact on private sector credit pose significant risks.

As Indonesia navigates these challenges, policymakers will need to adopt a more balanced approach to debt management, one that supports economic growth while maintaining fiscal discipline. Failure to do so could leave the country vulnerable to financial instability and erode investor trust in its economic governance.