The AFC was never purely caused by foreign debt. It began when the Thai government in July 1997 allowed the baht to float in response to its ballooning foreign debt. Instead of controlling the foreign debt, the Thai baht collapsed. This currency crisis created a contagion effect and spread to Indonesia and other Asian economies.
In Indonesia, the AFC was a wake-up call for overdue structural and financial reforms. After these were eventually implemented, market confidence returned, leaving the country better able to weather the 2007 global financial crisis, which left few scars on the economy. These structural and financial reforms ranged from the banking regulation and supervision to public financial accountability. With these reforms, the Indonesian economy today has been much better positioned to face the Covid-19 recession than it was in the 1990s.
As of February 2021, the IMF only accounts for 0.7 percent of Indonesia’s foreign debt. The US remains Indonesia’s largest foreign creditor. Within the past 10 years, the US has quadrupled its credit. Japan and China rank second and third. But this does not tell the whole story – Japan has halved its credit to Indonesia over the past decade. Within the same period, China has increased its credit sevenfold.
While critics have claimed that China’s foreign-credit arrangements, particularly within its signature Belt and Road Initiative, are a debt trap, others have argued that a recipient country’s ability to service its debt depends first on clean government and public financial accountability. After all, external debt in most cases is one option for a country rather than its only available source of financing.
Latin America is an important case study. As the emerging economies, they obtained foreign credit to boost development. But the 1980s turned into a lost decade for many of the countries in the continent. Argentina and Ecuador, for example, have become serial defaulters, whether to lenders or bondholders. And with their credit ratings plumbing the depths, capital flight has been a fact of life.
Indonesia should learn from Latin America’s debt crises. They prove that, despite promising prospects for economic development, poor debt management will raise doubts about a country’s creditworthiness, triggering widespread defaults, bankruptcies, and capital flight. These risks would derail any hopes a country might have for achieving social and economic progress.
But a foreign-debt crisis and an economic one are not the same. The key for Indonesia is to speed up its structural reforms. With sound macro and microeconomic policies, a sustainable foreign debt can finance what Indonesia needs to do to recover from the Covid-19 recession and emerge stronger after the pandemic subsides. If it manages its foreign debt shrewdly, cleanly and with the right purposes, this could usher in an Indonesian Golden Age by the time of the 2030 demographic dividend.