IMF: World Debt Hit Record & the meaning for Jokowi


Level of debt more than twice the size of global economy and unprecedented as a proportion of GDP. Populist politics, radical changes in the economic model, lack innovation & introduction of economic experiments superimposed on developing countries contribute to the economic uncertainty created.

The Guardian wrote that global debt levels have reached a record $152tn (£119tn) according to the International Monetary Fund – more than double the size of the global economy at 225% of annual global output.

The Washington-based fund said that two-thirds of the debt – approximately $100tn is held by the private sector, or companies and households. The IMF warns that debt “can carry great risks [at] excessive levels”.

The Fund’s report shows that the overall debt level has not decreased since the the financial crisis and recession of 2007-09, despite the fact that the most severe downturn of the post-war era was the consequence of too much reckless borrowing.

The IMF says that debt as a proportion of GDP has never been higher.

In a new report called the fiscal monitor, the IMF said there was concern that the level of debt, if reduced too quickly, could have a knock on effect on economic recovery, but it calls on governments to take steps to address the problem. Tax breaks to persuade creditors to lengthen repayment periods could be one option, it says.

Current low levels of growth are setting the stage for what the IMF calls a “vicious feedback loop” where “lower growth hampers deleveraging [paying down debt] and the debt overhang exacerbates the slow down.

“There are concerns that the sheer size of debt could set the stage for an unprecedented private deleveraging process.”

The IMF added: “It is clear that meaningful deleveraging will be very difficult without robust growth and a return to normal inflation. The path towards strong growth in those countries mired in a debt overhang may require decisive and prompt action to repair the balance sheets of banks—a clear priority in some European countries—and the private sector, notably non-financial corporations in China.”

A Indonesian perspective

Although the Indonesian forecast projects a positive picture, the fiscal debt, and shrinking commodity incomes as a result of Jokowi’s populist policies contribute to the lacklustre performance of the economy. The global downturn and socialist type of economics threatens the Indonesian economy which does not perform as expected.

Often described as “a gold mine in a minefield” by foreign investors, Indonesia is a country with enormous potential but one that is also an extremely difficult place for foreign companies to operate.

The Nikkei wrote, “..if past experience is any guide, Indonesia’s growth prospects are closely tied to export earnings..”. It is to be seen if Jokowi is understanding the need for pragmatic support of the engines that drive Indonesian prosperity.

Jokowi’s economic ambition and reform packages delivered like fast-food has not improved the economy. In defense of the president many of the reform packages are a reverse of the previous SBY administration. But many remain skeptical about the populist politics Jokowi.

In a May 19 opinion article in Kompas questioning the effectiveness of Jokowi’s economic reform packages, Indonesian economist and former chairman of the State Audit Agency Anwar Nasution noted that the Central Bureau of Statistics reported slowed economic growth and stagnant achievements in investment and exports in the first quarter of the year.

Indeed, Indonesia’s economy grew less than expected in the first quarter at 4.92 percent, down from analysts’ expectation of 5.07 percent.

Enter Sri Mulyani. The Financial Times wrote, the appointment of a finance minister known for her fiscal discipline and reformist mindset has boosted confidence in the government’s ability to tackle the short and long-term economic challenges, from the slowdown to the woeful state of the education and infrastructure systems.

Interestingly, Sri Mulyani is said to have politely declined the President’s offer when initially asked to join the Jokowi cabinet. “She cited the matter of income and her concern that she would be a political problem if she joined the cabinet”.

The re-appointment of Sri Mulyani Indrawati in July this year is a glimmer of hope but it is yet to be seen if the shining star of the Indonesian financial policy world is able to steer the socialist course Jokowi has set to a more pragmatic direction. And it is to be seen if Minister Mulyani will be facing a new clash with the tycoons who were the reason for her resignation in 2010.

Analysts believe the slightly better than expected second-quarter growth could signal an improvement in consumer confidence.

Although President Joko Widodo was elected in 2014 after promising to revamp the economy and propel growth to 7 per cent, economists say it is hard to see such a turnround happening.

“The president’s attempt to revamp the economy is a gamble”, a senior executive of a Singapore based commodity trading company said, “On one hand he [Jokowi] wants everyone to pay taxes and bring back assets, one the other hand we are the punching bag for his populist Forestry Minister because it sounds good for his re-election. Why would anyone trust him.”

Sentiments echoed by Sri Mulyani calls to the business community to trust the Jokowi administration.  “My job, first, is to restore confidence in the whole fiscal policy and our budget,” Dr Sri Mulyani said in an interview quoted by the Straits Times.

The state dinner hosted in early October was designed to engage the Indonesian business tycoons and rebuild some of the trust lost by the socialist rhetoric of the president. The tax amnesty program is one of the baby-steps to restore trust.

So far the amnesty captured Rp 435.3 trillion ($35.3 trillion) of unreported assets, including Rp 101.3 trillion in offshore assets and Rp 312.7 trillion assets in the country. But only 4.89% or a total of Rp 21.3 trillion the offshore assets were repatriated.  Only a total of 97.2 trillion or 58.97% of the Rp 165 trillion target was achieved.

The last quarter of 2016 growth is partially the result of cash loans agreed by the Asian Development Bank (ADB) in February contributing to the improved balance sheet. But many in the Indonesian business and regional investment community remains skeptical about the political populist agendas of Jokowi.

“Basket weaving is not economic policy”, says one long term observer of the Jakarta political scene. “The driving engine of the Indonesian economy, the palm oil sector, forestry, and mining were continuously attacked by what seems is the Presidents endorsed policy.”

“Whereas the tax amnesty is long overdue, the tax reform is one of the many issues in urgent need for repair. But what is Jokowi doing for the homegrown strategic industries who are the driver of the economy?” he said.

“Aggressive land re-distribution of state wealth giving away 40 million hectare of wealth to serve populist agendas to secure future re-electability is no different than the patronage politics of the past. Agrarian reforms sound good in theory but if politicized, as we seen in Zimbabwe or South Africa hold the potential for disaster in the making.” he concluded.

Although the tax reform is seen as a success, large amounts of assets of the Indonesian Chinese business community remains parked outside of Indonesia. The turmoils of 1998 and the prosecution of the Chinese remains fresh on the minds of many. Many argue promises made today may not be valid if the government changes.

Despite poised for economic prosperity radical changes in the economic mix does not provide the stimuli needed. Nor do economic policies who are based on outdated development models that lack pragmatic ‘Realpolitik’ of balanced economic policy.

Many investors remain cautious. One large European bank is not ready to touch Indonesia as a matter of concern about long term stability of the Jokowi administration. “Jokowi’s political education is no doubt a stoney road, and his signals are mixed. His policies towards the mining, oil and gas, forestry and palm oil industry are frankly, concerning.”

Sri Mulyani pragmatic policies may face a populist political narrative getting her at odds with the boss.

Jokowi often compared with the Indian Prime Minister Modi was assessed by Hugh Young, “Both impress in different ways — and disappoint,”. Mr. Young, managing director for Asia at Aberdeen Asset Management Plc., which has $428 billion in assets. “One man is rarely the solution to a country’s problems.”

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