Information about Asia and the Pacific Asia y el Pacífico
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Indonesia: Selected Issues

International Monetary Fund. Asia and Pacific Dept
Published Date:
March 2015
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Information about Asia and the Pacific Asia y el Pacífico
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Managing Fiscal Risks in Indonesia1

A. Introduction and Main Observations

1. This paper looks at current and prospective fiscal risks in Indonesia. It attempts to highlight the risks that could materialize when exogenous shocks interact with fiscal vulnerabilities to affect macroeconomic and financial stability. Focus is placed on those risks related to the general government’s fiscal and debt positions (Section B), nonfinancial state-owned enterprises (SOEs) (Section C), and health and pension spending (Section D).

2. Declining public debt in Indonesia since the late 1990s has strengthened the economy’s resilience to exogenous shocks, but vulnerabilities have built up recently that may heighten fiscal risks. They can be summarized as follows.

  • First, government funding needs have become increasingly reliant on foreign investors, with a change in market sentiment possibly leading to a sharp slowdown or reversal in foreign funding, squeeze on domestic bank liquidity, and rising borrowing costs.

  • Second, total and external indebtedness of key SOEs has risen. A sharper than anticipated weakening in the exchange rate, in combination with other risks, could erode the equity position and debt servicing capacity of those SOEs with incomplete hedges of their foreign exchange exposure.

  • Third, despite recent energy subsidy reforms, a close connection remains between budget performance and world oil prices, given the narrow revenue base and still significant reliance on oil and gas revenues. A further drop in oil prices could add to downside pressures on revenues and narrow space for key social and infrastructure spending, while also weighing on the finances of Pertamina, the state oil company.

  • Finally, public spending on health and pensions is expected to increase over the medium and long run, especially if coverage of social insurance is expanded.

3. To help mitigate these risks, prudent design and management of fiscal policy will remain essential. Specifically, moderate fiscal consolidation would keep funding needs contained, while non-oil and gas revenues mobilization is needed to safeguard fiscal space for social and infrastructure spending. Improved operational efficiency of SOEs could strengthen their financial performance and debt management. Finally, well-designed health insurance and pension systems will be important to ensuring long-run fiscal sustainability. In addition, fiscal risks should be communicated effectively with the public to reduce uncertainties for the private sector and improve the economy’s resilience to shocks. In this connection, Indonesia’s current practice of submitting an annual fiscal risk statement to Parliament along with the budget is commendable.

B. General Government Fiscal Position and Debt Sustainability

4. Indonesia has maintained favorable fiscal and debt positions compared with its peers. General government debt at 26 percent of GDP at end 2014 and current gross funding needs of around 4 percent of GDP a year are much lower than the median of other emerging market economies (EMEs) (Table 1 and Figure 1). Indonesia’s public debt has an average maturity of 10 years and an average interest rate that is well below GDP growth, which also compare favorably with the peers. Local governments’ debt is insignificant, since their borrowing is closely monitored and regulated by the central government.

Table 1.Indonesia: General Government Debt, 2008–2013
(In percent of GDP)
General government debt33.128.426.124.424.026.1
Central government debt33.128.426.124.424.026.1
Decomposition by type
Foreign loans14.810.
Of which: bilateral and multilateral14.310.
Government securities18.317.516.516.016.518.3
Currency denomination
Resident decomposition
Held by residents11.110.611.010.7
Held by nonresidents15.013.813.015.4
Maturity decomposition
Short-term 1/
Medium- and long-term (due in more than one year)24.322.522.423.9
(In percent of total)
Central government debt
Non-rupiah denominated52.147.446.345.144.546.7
Held by nonresidents57.456.754.158.8
Short-term 1/
Memorandum items:
General government gross financing needs (percent of GDP)
Sources: Ministry of Finance.1/ Includes medium- and long-term debt due in one year or less.
Sources: Ministry of Finance.1/ Includes medium- and long-term debt due in one year or less.

Figure 1.Selected Emerging Market Economies: Public Debt Profile, 2014

Sources: IMF, Fiscal Monitor database; and IMF staff estimates.

1/ For Indonesia, data as of end 2013; for other countries, data are 2014:Q1 or latest available.

5. In addition to low public debt, contingent liabilities also appear manageable. Based on available data, the size of contingent liabilities is not large enough to pose an immediate threat to debt sustainability. Nonfinancial SOEs’ debt was moderately low at 5 percent of GDP at end 2013, but nearly doubled as a share of GDP since end 2009 (see Section C). Debt guarantees to support the financing of electricity and water infrastructure projects totaled only 1½ percent of GDP as of March 2014. Public-private partnerships (PPPs) projects are another potential source of contingent liabilities due to obligations such as state guarantees for minimum revenues, but Indonesia has contracted only around 70 PPP projects since 1990, with the cumulative investment of US$35 billion (equivalent to about 4 percent of 2014 GDP).2 In the event of a large one-time contingent liability shock (equivalent to 10 percent of GDP), the ratio of public debt and gross funding needs to GDP would initially rise, but public debt would unlikely be put on an upward trajectory, reflecting Indonesia’s favorable public debt dynamics (Figure 2).

Figure 2.Indonesia: Contingent Liability Shock 1/

Sources: Data provided by the Indonesian authorities; and IMF staff estimates.

1/ The baseline envisages a small primary deficit over the medium term; see IMF, Indonesia: Staff Report for the 2014 Article IV Consultation, Appendix III on “Indonesia: Debt Sustainability Analysis.” The contingent liability shock scenario assumes a one-time contingent liability shock equivalent to 10 percent of GDP in 2015, accompanied by a 300 basis points increase in the interest rate for the debt issued in 2015.

6. Nevertheless, vulnerabilities have built up in recent years due to increased dependence on government funding from foreign investors. The share of public debt held by nonresident investors (rupiah and foreign currency denominated) was around 59 percent of the total at end 2013, among the highest in major EMEs (Figure 1, bottom panel), as Indonesia has benefitted from the trend of increased risk appetite and global portfolio allocation to EMEs with the advent of unconventional monetary policies and low interest rates in the advanced economies since 2009 (IMF, 2014).3 Nonresident investors raised their holdings in Indonesia in 2014, amid global push factors and relatively attractive yields, purchasing around 70 percent of the net issuance of government securities during the year (Figure 3, left panel), with their ownership of rupiah-denominated government bonds reaching nearly 40 percent of the total stock outstanding at end 2014 (Figure 3, right panel).

Figure 3.Indonesia: Government Debt and Foreign Investors, 2009-14

Sources: Data provided by the Indonesian authorities; Bloomberg L.P.; and IMF staff estimates.

7. A narrow revenue base with reliance on oil and gas revenues adds to fiscal vulnerabilities. At around 17½ percent in 2014, Indonesia’s general government revenue-to-GDP ratio is among the lowest in peer EMEs, with revenues from oil and gas production around 17 percent of the total (3 percent of GDP). While the government’s fiscal rule has successfully maintained the general government deficit below the cap of 3 percent of GDP, the low revenue base coupled with large energy subsidies have constrained public spending on infrastructure and social programs in recent budgets. Energy subsidy reforms have opened space for larger spending in these areas.4 However, a further drop in world oil prices from the IMF’s baseline outlook would subject the general government budget to additional revenue losses, with less offset coming from subsidy costs savings than in the past (Table 2), all pointing to the need to mobilize more non-oil and gas revenues.

Table 2.Indonesia: Central Government Operations, 2014-15
2014 Prel.2015
BaselineScenario 1 Low oil price 1/Scenario 2 High oil price 1/
Crude oil price (US dollars per barrí96.251.430.070.0
(In percent of GDP)
Oil and gas3.
Non oil and gas12.312.112.112.1
Energy subsidy3.
Overall balance−2.3−2.4−2.8−2.1
Sources: Data provided by the Indonesian authorities; and IMF staff estimates and projections.1/ Scenario 1 (Scenario 2) assumes a world oil price of US$30 per barrel (US$70 per barrel). A lower oil price would reduce oil and gas revenues, while reducing energy subsidies and local government transfers (included in “other expenditure”). The rest of parameters are the same as in the baseline.
Sources: Data provided by the Indonesian authorities; and IMF staff estimates and projections.1/ Scenario 1 (Scenario 2) assumes a world oil price of US$30 per barrel (US$70 per barrel). A lower oil price would reduce oil and gas revenues, while reducing energy subsidies and local government transfers (included in “other expenditure”). The rest of parameters are the same as in the baseline.

C. Nonfinancial State-Owned Enterprises

8. Nonfinancial SOEs play an important role in the Indonesian economy, particularly in the energy sector. As of end 2013, Indonesia had 124 nonfinancial SOEs, with total assets of about 21 percent of GDP. Pertamina and PLN (Perusahaan Listrik Negara), the state electricity company, account for more than 60 percent of these assets (Figure 4). In upstream activity, Pertamina is currently the second largest oil producer in Indonesia, accounting for around 15 percent of average daily oil output in Indonesia in 2013, and the third largest gas producer, with a market share of 13 percent in 2013. On the downstream side, it has maintained a de facto monopoly in the distribution of key petroleum products such as gasoline and diesel. As for PLN, it accounts for more than 80 percent of national electricity generation and effectively monopolizes electricity distribution. For most of the final products of Pertamina and PLN (e.g., regular gasoline, diesel, LPG (3kg canisters), kerosene, and electricity), prices are administered by the government. While recent energy subsidy reforms effectively discontinued regular gasoline subsidies for all and electricity subsidies for medium and large users, the other products are still subsidized by the government. For such subsidized products, the government budget compensates Pertamina and PLN with payments calculated based on agreed formulas to reflect economic costs, including changes in the exchange rate.

Figure 4.Indonesia: Assets of Nonfinancial SOEs, 2013

Sources: Data provided by the Indonesian authorities; and IMF staff estimates.

9. Total and external debt of nonfinancial SOEs has increased in recent years, while their profits have compressed (Figure 5). Although still relatively low, total debt doubled as a share of GDP between 2009 and 2013. About two-thirds of this increase originated from debt issued to nonresidents, with external debt reaching 2.8 percent of GDP at end 2013 (54 percent of total). Similarly, the share of foreign currency-denominated debt rose to about 70 percent in 2013. This trend mirrored a similar development in the corporate sector in Indonesia, reflecting loose global financial conditions and low borrowing costs abroad. Pertamina and PLN accounted for the majority of the increase in the aggregated debt level of nonfinancial SOEs, using the proceeds from new borrowing to finance investment in physical assets (e.g., oil pipelines, power plants). As a result, their balance sheets have become much more leveraged in recent years. On the other hand, nonfinancial SOEs’ profits have fallen the past few years, while facing higher interest payments. PLN recorded losses of about 0.3 percent of GDP in 2013, mainly due to exchange rate depreciation.

Figure 5.Indonesia: Financial Indicators of Nonfinancial SOEs, 2009–13

Sources: Data provided by the Indonesian authorities; Public Sector Debt Statistics of Indonesia; financial statements of Pertamina and PLN; and IMF staff estimates.

10. These developments make nonfinancial SOEs more susceptible to external shocks. For SOEs that have relied on external debt financing, shifts in the global financial sentiment could raise their borrowing costs and further weaken profitability. For those SOEs with incomplete hedges of their foreign exchange exposure, exchange rate depreciation could erode their net worth, with PLN appearing more vulnerable in this respect. In addition, low world oil prices would affect Pertamina’s revenues from upstream production and its profit margins. To reduce these vulnerabilities and better ensure profitability and debt sustainability, improvements in the operational efficiency of SOEs and maintenance of sound debt management remain important. A strengthening in the institutional capacity of the government and SOEs to plan, select, and execute high-quality infrastructure projects is also crucial, in light of government’s strategy to recapitalize a number of SOEs in 2015 to increase their borrowing capacity (including external) to support infrastructure investment.5

D. Health and Pension Spending

11. Public spending on health care and old-age pensions could become a significant source of fiscal risks in future. Broadly speaking, this spending has three components: (i) demographics, because pension spending increases with the number of retirees, while the elderly spend more on health care; (ii) coverage of health care insurance and public pension schemes, and (iii) adequacy of benefit levels per recipient. While strengthening public health insurance and old-age pensions is seen as supporting stronger, more inclusive growth in developing economies, it recognizably can add to fiscal pressures. Population ageing tends to exacerbate such pressures in the long run.

12. In recent years, public health and pension spending in Indonesia has been among the lowest of its peers (Figure 6). In 2012, central government outlays for health and pensions were 1.2 percent of GDP and 0.8 percent of GDP, respectively. Demographics does not fully explain this, with Indonesia’s old-age dependency ratio—defined as the ratio of the elderly population (age 60 and older) to the working-age population (age 15–59)—was at 12 percent in 2010, only slightly lower than the median for its peers (14 percent). Instead, low population coverage and possibly inadequate benefit levels appear to contribute more. For health, public spending covered only 40 percent of total health spending in Indonesia in 2012 (the median of the comparators included in Figure 6 is 50 percent). Also, because of supply bottlenecks, access to health care services is more limited in rural areas, holding down average per capita health spending (World Bank, 2014). For pensions, public spending consists mostly of civil service pensions (0.7 percent of GDP in 2012), with the rest accounted for by the pension scheme for formal private sector workers (i.e., the PT Jamsostek program). However, these two public pension schemes covered only around 12 percent of the total labor force in 2012 (Muliati and Wiener, 2014).6

Figure 6.Selected Emerging Market Economies: Public Health and Pension Spending, 2010-12

Sources: PT Jamsostek, Annual Report 2013; United Nations, World Population Prospects, 2012 Revision; World Bank, World Development Indicators; and IMF, Fiscal Monitor database, and staff estimates.

13. In this context, the authorities have embarked on an initiative towards universal social insurance, including for health insurance and old-age pensions. The initiative began in 2004 with enactment of the Law on the National Social Security System, followed in 2011 by a law establishing a single social insurance administrator, or BPJS (Badan Penyelenggara Jaminan Sosial). Under this framework, the government began implementing a universal health insurance system (BPJS Health) in January 2014, consolidating several public health insurance schemes.7 The new scheme is financed through contribution payments and aims at covering the entire population by 2019, including informal sector workers. Currently, the central government fully subsidizes contribution payments of the poor and the near-poor (the lowest 35 percent of income distribution), with the annual subsidy cost budgeted at around 0.2 percent of GDP in 2014. Separately, BPJS will start offering employment-related social insurance in July 2015, including old-age pensions and death benefits (called BPJS Employment). The new scheme aims at covering formal sector workers and will be financed by their payroll contributions, with no budgetary support envisaged. The pension schemes for civil servants and private sector workers will eventually be integrated into this scheme.

14. Demographic prospects would contribute to a modest rise in public pension and health spending over the next few decades. Assuming coverage and benefit levels remain unchanged and taking account of an expected rise in Indonesia’s old-age dependency ratio to 35 percent in 2050 (Figure 7, left panel), public spending on health and pensions would increase by 0.2–0.3 percentage points of GDP by 2020, and only double as a share of GDP by 2050 (Figure 7, right panel).

Figure 7.Indonesia: Demographic Prospects and Public Health and Pension Spending, 2010-50

Sources: PT Jamsostek, Annual Report 2013; United Nations, World Population Prospects, 2012 Revision; World Bank, World Development Indicators; and IMF, Fiscal Monitor database, and staff estimates.

1/ Baseline projections for pension and health spending take account of Indonesia’s demographic prospects based on United Nations, World Population Prospects, 2012 Revision.

15. Broadening the coverage of health insurance would require careful management over the medium term. Following the experience of Thailand in implementing universal health coverage, an alternative scenario might see the share of public spending in total health care spending rise from 40 percent now to 60 percent by 2020. In the event, the ratio of public health spending to GDP would reach 2.1 percent of GDP in 2020—0.7 percentage points of GDP above the baseline (Figure 7, right panel).8 Eventually, public health spending would rise to 3.6 percent of GDP by 2050. To avoid undue burden on the budget, BPJS Health will need to ensure its financial sustainability. Contribution rates and patient copayments should be set at adequate levels, with budgetary offsets to limit burden for low-income participants.

16. The pension system should be designed prudently to avoid emergence of fiscal risks in the long run. Compared to BPJS Health, broadening coverage of the BPJS Employment will be challenging because informal sector workers account for 65 percent of the labor force (Muliati and Wiener, 2014). Even if this occurs, pension spending would not begin to climb noticeably until new entrants start to retire several decades later. Nevertheless, any expansion of the system should be designed in a way that avoids emergence of actuarial imbalances in future, which might necessitate budgetary support. Key parameters of pensions systems such as contribution rates, benefit levels, and retirement age will need to be reviewed periodically, backed by actuarial studies. In view of rising life expectancy, a gradual increase in retirement age could also be warranted.


    International Monetary Fund2013Staff Guidance Note for Public Debt Sustainability Analysis in Market-Access Countries.” Available via the Internet:

    International Monetary Fund2014Global Financial Stability Report; Chapter 1, “Moving from Liquidity- to Growth-Driven Markets” pp. 165 (Washington: International Monetary FundApril).

    MuliatiIene and MitchellWiener2014Pension Reform Experience in Indonesia” Chapter 17 in Equitable and Sustainable Pensions: Challenges and Experience eds. by BenedictClements and others (Washington: International Monetary Fund).

    World Bank2012Reforming the Civil Service Pension and Tabungan Hari Tua (THT) ProgramsWorld Bank Indonesia Policy Brief Issue 1April 2012. Available via the Internet:

    World Bank2014Indonesia Development Policy Review: Avoiding the Trap. Available via the Internet:

Prepared by Masahiro Nozaki.

Based on the World Bank’s database on private participation in infrastructure (see

Debt held by nonresidents is currently above the early-warning threshold of 45 percent under the IMF’s debt sustainability framework for EMEs (IMF, 2013).

See IMF, Indonesia—Staff Report for the 2014 Article IV Consultation, Box 5, “Indonesia: Fuel Subsidy Reform and the Fiscal Impact of Low World Oil Prices.”

See Indonesia—Staff Report for the 2014 Article IV Consultation, Box 4, “Indonesia: Closing the Infrastructure Gap.”

In addition to the civil service pension scheme, civil servants also participate in a retirement benefit program called the THT (Tabungan Hari Tua) program, which provides lump sum retirement benefit. The accrued liabilities of the THT program are projected to reach around 2 percent of GDP by 2015 (World Bank, 2012).

The programs for civil servants (Askes), formal sector workers (Jamsostek), and the poor and near poor (Jamkesmas) have been consolidated into BPJS Health. Universal coverage still requires participation of non-poor informal workers.

Thailand has achieved universal coverage by expanding its health care system. As a result, the share of public spending in total health spending increased from 56 percent in 2000 to 76 percent in 2007 and has remained around this level since then.

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