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Oil Rich, Profit Poor
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10867 |
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Section : |
CURRENT ISSUES
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7 / 1986 |
2,688 Words |
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Thomas J. Reckford
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Indonesia trails only Brazil, Mexico, Argentina, and South Korea among the top Third World debtors.
Bankers with significant loans to Indonesia are worried, but not nearly as scared as those with loans in Latin America. They are concerned, however, with the current decline in oil prices and its implications for financial, economic, political, and social order in Indonesia.
The reasons are varied. Indonesia's total debt, both public and private, amounts to $35 billion, based on 1984 data. The debt increased a substantial 14 percent a year between 1978 and 1984. Meanwhile, debt service costs increased 14.5 percent per year and now amounts to a hefty $4.5 billion annually.
The debt service ratio (the percentage of exports spent on servicing the foreign debt) has also become a serious problem. The ratio has grown from 18 percent in 1978 to a worrisome 25 percent today. Howard Turk, in his paper "Asia's External Debt," explains that the official debt service ratio is 20 percent but the national oil exports are overstated due to a complex accounting system resulting from various contractual relationships between Pertamina, the Indonesian state oil company, and foreign oil companies that have evolved since the 1950s.
In any case, debt servicing is an especially tricky task when oil revenues slip below $15 a barrel. This article will examine the myriad implications of the debt problem for Indonesia and for its debtors.
The days of the oil price shocks in 1973-1974 and 1979-1980 were heady ones for oil-rich Indonesia. Most of its Arab partners in the Organization of Petroleum Exporting Countries (OPEC) had small populations and plenty of petrodollars left over to invest in international banks in Europe and the United States.
Indonesia, however, with its huge population (now 162 million), its army of unemployed and underemployed people and its merchants and soldiers eager to get rich quickly, was pleased to be able to borrow large amounts of money. Its credit rating was, of course, enhanced by oil reserves. In turn, the lenders were not shy about encouraging new projects.
Barreling downhill
Indonesia's balance of payments, and thus its ability to service the debt, have been badly damaged by the sharp drop in oil prices during the last year. For the past decade, oil has made up 60 percent of export earnings and about the same amount of government revenue. Each price drop of a dollar per barrel costs the government roughly $300 million.
Unfortunately for Indonesia, the outlook for oil prices does not appear particularly rosy. Many Wall Street and government analysts predict that oil prices will rebound to $18 to $22 per barrel by the end of 1986, but this view is based on the unlikely assumption that OPEC can overcome its differences and design a workable production agreement. OPEC members, however, have a fundamental disagreement over production levels for each country.
The Persian Gulf states and members of the Gulf Cooperation Council
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