Indonesia Proposes Foreign Debt Restrictions

7 September 2011 FDI Team


Bank Indonesia (BI) has flagged the idea of setting rules to limit local private companies’ exposure to foreign debt. BI Governor Dr Darmin Nasution has spoken of a possible need for regulation, to prevent firms that do not have foreign currency revenue streams from borrowing in foreign currencies.


The comments come as Indonesian firms seek to take up more US dollar-denominated debts, made more attractive by the weakness of the American currency. Overseas creditors have been drawn to Indonesia, which has remained resilient throughout the recent global slowdown. The result is a flow of temptingly cheap foreign currency for local Indonesian firms, eager to expand in the growing domestic economy. Given the volatility of currencies around the world, overexposure to the dollar is potentially dangerous.

It was a similar pattern of borrowing that catalysed the 1998 Asian Financial Crisis in Indonesia. Local firms chose to borrow cheaper US dollars, in response to a comparatively strong rupiah. The rupiah then rapidly depreciated following the collapse of the Thai baht, resulting in numerous corporate debt defaults. Memories of the crisis still weigh heavily on the BI, and the Indonesian Government more broadly. That crisis resulted in the downgrading of Indonesia’s long-term debt to “junk bonds”, by ratings agency Moody’s. It also played a significant role in the resignation of President Suharto.

The Jakarta Post noted that:

‘Indonesia’s debt-to-GDP (gross domestic product) ratio is currently about 26 per cent, well below an average level of over 70 per cent in Europe and the US. The nation’s outstanding external debt was US$214.5 billion as of April, US$85.9 billion of which was owed by the private sector and US$128.6 billion by government bondholders. In the second quarter, private companies borrowed US$6.3 billion in new debt, up from US$4.4 billion in the first quarter. Total new foreign debt in the first half of 2011 reached US$10.7 billion, up from US$6 billion in the same period last year and up from US$4 billion in the first half of 2009.’[1]

Any new regulations will not affect firms that export their output and therefore earn foreign currency. Accordingly, international trade with Indonesia should remain largely unaffected by any new regulations. Dr Nasution’s remarks must also be placed in the wider context of the attempts by the BI to control a booming domestic economy and the resulting inflationary pressures. 

Andrew Campbell

Future Directions International Research Intern

Indian Ocean Research Programme


[1] Samboh, E., ‘BI Considers Foreign Debt Rule for Local Firms’, Jakarta Post,                     5 September 2011. <>. 

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