Indonesia is in the news because its currency has been falling. An article in the FT has even suggested a parallel with the 1990s Asian crisis, while others have suggested that the country’s lower external debt position today, compared to is position immediately before the Asian crisis, means that the situation is less threatening. Let us take a look at how the situation in Indonesia at present compares to that of the 1990s.

Total External Debt to GDP

Figure 1 shows Indonesia’s total external debt divided by its GDP. In 1996, before the crisis, this value stood at 53%. At the end of 2011, it was 25%.

Figure 1

Figure 1: Indonesia total external debt to GDP. Click to enlarge.

Figure 2 shows a breakdown of Indonesia’s external debt, as a proportion of GDP, between the public and private sectors. These series are only available from 2003. The chart shows that the total external debt ratio has grown a little since the end of 2011, to around 29% (the total of these series is not identical to that shown in figure 1, but it is reasonably close: see figure 3). So we can say that the country’s external debt position is considerably better than it was in 1996.

Figure 2

Figure 2: Indonesia public and private external debt to GDP. Click to enlarge.

Figure 3

Figure 3: Comparison of old and new external debt to GDP series.

Total Currency Reserves

Figure 4 shows Indonesia’s FX reserves as a percentage of GDP. At the end of 1996, the series stood at 7%. Today it is 11% (down a little from 2011, when the currency started to weaken: see figure 5).

Figure 4

Figure 4: Indonesia foreign-exchange reserves as a percentage of GDP. Click to enlarge.

Figure 5

Figure 5: IDR/USD (log scale). Click to enlarge.


Although Indonesia is in a better position than in 1996, right before the Asian crisis, its position is not so much better as to make one entirely sanguine about its prospects. External debt is high enough that a currency fall of the same magnitude as that of 1997 would leave it with a significant problem. And Menzie Chinn argues that “greater exchange rate stability implies greater output volatility, which can be mitigated if a country holds international reserves (IR) at a level higher than a threshold (about 20% of GDP)”. Indonesia’s, at 11%, are well below that threshold.

However, this does not mean that a repeat of the Asian crisis is likely. It is worth noting that Indonesia allowed its currency to fall in 2008, during the global financial crisis, rather than attempting to maintain a currency band at all costs (the latter being a policy that added to the magnitude of the currency’s decline when it was finally allowed to float in 1997). Perhaps, if capital outflows were to accelerate, it would do the same again.

I do not know the levels of external debt with which other countries have entered past crises, and what the results have been. That is an obvious area for further work.