INDONESIAN FOREIGN DEBT - HEADED FOR A CRISIS OR FINANCING SUSTAINABLE GROWTH

This paper examines the build-up in Indonesia's foreign debt between 1 981 and 1993, and explores the potential for a debt crisis during Repe lita VI. It concludes that Indonesia is not headed toward a crisis in the immediate future. Borrowed funds have generally financed productiv e investments, contributing to rapid growth in GDP and exports since t he late 1980s. If recent trends continue, debt should ease gradually; if not, the economy could withstand a substantial balance of payments shock, at least for a while. A debt servicing problem, although unlike ly, is conceivable by the end of the decade. Short-term debt is growin g rapidly, non-oil export growth has slowed, and debt service remains high. Appropriate government actions to reduce the potential for a cri sis include further deregulation to support growth in non-oil exports, discouraging implicit government guarantees for private sector projec ts, and reducing government exposure to yen-denominated debt.