Unpacking the Forces Behind Indonesia's Foreign Debt: What Drives Long-Term and Short-Term Borrowing?
Abstract
Research Originality: This research explores the factors influencing Indonesia's foreign debt, providing insights into the long-term and short-term effects of inflation, exchange rates, the Fed Funds Rate (FFR), budget deficit, and exports. The originality lies in the comprehensive analysis of these variables using time series data from 2005 to 2022.
Research Objectives: This study examines the impact of key macroeconomic variables on Indonesia's foreign debt, analyzing both long-term and short-term relationships to inform policy and future research.
Research Methods: The study uses time series data from 2005 to 2022, applying the Error Correction Model (ECM) with EViews10 to analyze the dynamic relationships between foreign debt and the influencing factors.
Empirical Results: The study finds that in the long term, exchange rates and exports positively influence foreign debt, while inflation has a negative impact. In the short term, only the Fed Funds Rate (FFR) negatively affects foreign debt. All variables are significantly influential in both the short and long term.
Implications: These findings highlight the importance of managing inflation, exchange rates, and exports in the long term while considering the short-term impact of global financial conditions, such as the FFR, on Indonesia's foreign debt.
JEL Classification: F34, E44, E31, F41, H63, C32
Keywords
References
Abraham, F., Cortina Lorente, J. J., & Schmukler, S. (2020). Growth of Global Corporate Debt: Main Facts and Policy Challenges. Policy Research Working Paper 9394. World Bank.
Abuka, C., Alinda, R. K., Minoiu, C., Peydró, J. L., & Presbitero, A. F. (2019). Monetary Policy and Bank Lending in Developing Countries: Loan Applications, Rates, and Real Effects. Journal of Development Economics, 139, 185–202. https://doi.org/10.1016/j.jdeveco.2019.03.004.
Adistya, P. A., Radise, S. B., & Agustin, G. (2024). The Analysis Between Purchasing Power Parity and Exchange Rates, Inflation and Gross Domestic Product in Developing and Developed Countries Asia and Europe During Covid-19 Pandemic. International Journal of Business, Law, and Education, 5(1), 897–918. https://doi.org/10.56442/ijble.v5i1.518.
Ahmad, S., Ali, M., & Hussain, I. U. (2021). The Exchange Rate and Its Impact on Pakistani Exports: An ARDL Approach. Journal of Management, Economics, and Industrial Organization, 5(3), 62–69. https://doi.org/10.31039/jomeino.2021.5.3.5.
Ahmed, R., Aizenman, J., & Jinjarak, Y. (2021). Inflation and Exchange Rate Targeting Challenges Under Fiscal Dominance. Journal of Macroeconomics, 67, 103281. https://doi.org/10.1016/j.jmacro.2020.103281
Akram, T. (2022). A Simple Model of the Long-term Interest Rate. Journal of Post Keynesian Economics, 45(1), 130–144. https://doi.org/10.1080/01603477.2021.1878906.
al-Rubaie, Q. L. A., & Ahmed, A. S. (2023). Measuring and Analyzing the Repercussions of Public Debt in Financing the General Budget Deficit for the Iraqi Economy After 2003 Using the (Eviews) Program. Materials Today: Proceedings, 80, 3144–3154. https://doi.org/10.1016/j.matpr.2021.07.180.
Alekseievska, H., Bril, M., Kotenok, A., Tomchuk, O., Budiaiev, M., & Popenko, S. (2024). Monetary Instruments in Addressing Economic Crises: Effectiveness and Challenges. Financial and Credit Activity: Problems of Theory and Practice, 5(58), 9–22. https://doi.org/10.55643/fcaptp.5.58.2024.4504.
Amade, M., & Oyigebe, P. (2024). Budget Deficit and Economic Growth in Nigeria: An Empirical Analysis. International Journal of Health Economics and Policy, 9(1), 1–18.
Arisa, G. M. (2020). Impact of External Debt on Inflation and Exchange Rate in Kenya. (Unpublished Master’s Thesis). Kenyatta University, Nairobi.
Aslam, M., & Jaafar, R. (2020). Budget Deficit and the Federal Government Debt in Malaysia. In Yonk, R. M., & Bobek, V (Eds). Perspectives on Economic Development - Public Policy, Culture, and Economic Development. https://doi.org/10.5772/intechopen.91457
Benkhaira, J., & El Hassani, H. (2023). Economic Recovery Through the Money Supply and Public Spending in Morocco: an Empirical Investigation. African Journal of Economic and Management Studies, in-press. https://doi.org/10.1108/AJEMS-04-2023-0134.
Blanchard, O. (2023). Fiscal Policy under Low Interest Rates. Cambridge: MIT Press.
Blavasciunaite, D., Garsviene, L., & Matuzeviciute, K. (2020). Trade Balance Effects on Economic Growth: Evidence from European Union Countries. Economies, 8(3), 54. https://doi.org/10.3390/economies8030054.
Brandao-Marques, L., Casiraghi, M., Gelos, G., Harrison, O., & Kamber, G. (2024). Is High Debt Constraining Monetary Policy? Evidence from Inflation Expectations. Journal of International Money and Finance, 149(143), 103206. https://doi.org/10.1016/j.jimonfin.2024.103206
Bräuning, F., & Ivashina, V. (2020). Monetary Policy and Global Banking. Journal of Finance, 75(6), 3055–3095. https://doi.org/10.1111/jofi.12959.
Chowdhury, E. K., Dhar, B. K., & Gazi, M. A. I. (2023). Impact of Remittance on Economic Progress: Evidence from Low-Income Asian Frontier Countries. Journal of the Knowledge Economy, 14(1), 382–407. https://doi.org/10.1007/s13132-022-00898-y.
Coulibaly, I., Gnimassoun, B., Mighri, H., & Saadaoui, J. (2024). International Reserves, Currency Depreciation and Public Debt: New Evidence of Buffer Effects in Africa. Emerging Markets Review, 60, 101130. https://doi.org/10.1016/j.ememar.2024.101130.
Dal Borgo, M. (2021). The Effect of an Income Shock on Subnational Debt: Micro Evidence from Mexico. World Bank Working Paper.
Dey, S. R., & Tareque, M. (2020). External Debt and Growth: Role of Stable Macroeconomic Policies. Journal of Economics, Finance and Administrative Science, 25(50), 185–204.
Djalo, M. U., Yusuf, M., & Pudjowati, J. (2023). The Impact of Foreign Debt on Export and Import Values, The Rupiah Exchange Rate, and The Inflation Rate. Jurnal Ekonomi, 12(1), 1124-1132.
Elkhishin, S., & Mohieldin, M. (2021). External Debt Vulnerability in Emerging Markets and Developing Economies During the COVID-19 Shock. Review of Economics and Political Science, 6(1), 24–47. https://doi.org/10.1108/REPS-10-2020-0155.
Emako, E., Nuru, S., & Menza, M. (2022). The Effect of Foreign Direct Investment on Economic Growth in Developing Countries. Transnational Corporations Review, 14(4), 382–401. https://doi.org/10.1080/19186444.2022.2146967.
Espinosa, E. G. (2023). Modern Monetary Theory. New Jersey: Routledge.
Farooq, U., Ahmed, J., & Khan, S. (2021). Do the Macroeconomic Factors Influence the Firm’s Investment Decisions? A Generalized Method of Moments (GMM) Approach. International Journal of Finance and Economics, 26(1), 790–801.
Georgescu, I., Nica, I., Energies, J. K.-, & 2024, U. (2024). Towards Sustainability: Understanding Norway’s Ecological Footprint Through the Framework of the Environmental Kuznets Curve. Energies, 17(23), 6074. https://doi.org/10.3390/en17236074.
Gupta, V., & Dubey, A. (2024). US Monetary Policy, the Global Financial Cycle and Cross-Country Financial Cycles. Journal of Economics and Finance, 2024. https://doi.org/10.1007/s12197-024-09680-z.
Handaria., Madris., & Saudi, N. D. S. (2022). State Budget Deficit Analysis in Indonesia Year 2002-2022. International Research Journal of Advanced Engineering and Science, 7(3), 110–120.
Hendrayanti, S., Nafiah, Z., & Aminah, S. (2024). The Effect of Inflation, Export and Import on Economic Growth in Central Java. Jurnal Ccapital: Kebijakan Ekonomi, Manajemen dan Akuntansi, 5(2), 1–15. https://doi.org/10.33747/capital.v5i2.189.
Hidayat, A. M., Yusiana, R., & Soleh, A. (2019). Determinants of Government Budget Deficits and Their Impact on Indonesian Foreign Debt. International Conference on Rural Development and Enterpreneurship 2019, 5(1), 1–9.
Ibrahim, A. A. A., & Bashir, M. S. (2023). The Effects of Currency Devaluation on the Bilateral Trade Balance of Sudan: Cointegration and Error-Correction Modeling. Journal of Economics, Management and Trade, 29(2), 16–33. https://doi.org/10.9734/jemt/2023/v29i21076.
Jokolelono, E., Djirimu, M., Mangun, N., Darwis, I., & Jaya, A. H. (2023). Determinant Factors on Indonesia’s Economic Growth: An Analysis of Foreign Debt, Foreign Investment, Exports, and Exchange Reserves. Journal of Economics, Finance and Management Studies, 6(5), 40-5-. https://doi.org/10.47191/jefms/v6-i5-40.
Juliansyah, H., Ganesha, Y., Ichsan, I., Nailufar, F., & Terfiadi, S. Y. (2022). Effect of Export Import and Investment on Economics Growth in Indonesia (VECM Analysis Method). Journal of Malikussaleh Public Economics, 5(1), 16-25. https://doi.org/10.29103/jmpe.v5i1.8153.
Kentikelenis, A., & Stubbs, T. (2022). Austerity Redux: The Post-pandemic Wave of Budget Cuts and the Future of Global Public Health. Global Policy, 13(1), 5–17. https://doi.org/10.1111/1758-5899.13028.
Kim, S. S., Chung, J., Hwang, J. H., & Pyun, J. H. (2020). The Effectiveness of Foreign Debt in Hedging Exchange Rate Exposure: Multinational Enterprises vs. Exporting Firms. Pacific Basin Finance Journal, 64, 101455. https://doi.org/10.1016/j.pacfin.2020.101455.
Koijen, R. S. J., & Yogo, M. (2021). Exchange Rates and Asset Prices in a Global Demand System. NBER Working Paper 27342.
Kose, M. A., Nagle, P., Ohnsorge, F., & Sugawara, N. (2021). Global Waves of Debt: Causes and Consequences. Washington D.C.: World Bank.
Kumhof, M., Rungcharoenkitkul, P., & Sokol, A. (2020). How Does International Capital Flow? BIS Working Papers No. 890.
Liu, A. Y., Oi, J. C., & Zhang, Y. (2022). China’s Local Government Debt: The Grand Bargain. China Journal, 87(1), 40–71. https://doi.org/10.1086/717256.
Malini, H., Seinna, Y. E., & Rustam, R. (2022). Indonesia’s Foreign Debt Development and Macroeconomic Variables. Jurnal Ekonomi Bisnis Dan Kewirausahaan, 11(2), 144. https://doi.org/10.26418/jebik.v11i2.52744.
Manasseh, C. O., Abada, F. C., Okiche, E. L., Okanya, O., Nwakoby, I. C., Offu, P., Ogbuagu, A. R., Okafor, C. O., Obidike, P. C., & Nwonye, N. G. (2022). External debt and economic growth in Sub-Saharan Africa: Does governance matter? PLoS ONE, 17(3), 0264082. https://doi.org/10.1371/journal.pone.0264082.
Morina, F., Hysa, E., Ergün, U., Panait, M., & Voica, M. C. (2020). The Effect of Exchange Rate Volatility on Economic Growth: Case of the CEE Countries. Journal of Risk and Financial Management, 13(8), 177. https://doi.org/10.3390/jrfm13080177.
Nazamuddin, B. S., Wahyuni, S. S., Fakhruddin, F., & Fitriyani, F. (2024). The Nexus between Foreign Exchange and External Debt in Indonesia: Evidence from Linear and Nonlinear ARDL Approaches. Journal of the Asia Pacific Economy, 29(2), 810–836. https://doi.org/10.1080/13547860.2022.2054153.
Nurjanah, R., & Mustika, C. (2021a). The Influence of Imports, Foreign Exchange Reserves, External Debt, and Interest Rates on the Currency Exchange Rates Against the United States Dollar in Southeast Asia Countries. Jurnal Perspektif Pembiayaan dan Pembangunan Daerah, 9(4), 365–374. https://doi.org/10.22437/ppd.v9i4.12706.
Nurjanah, R., & Mustika, C. (2021b). The Influence of Imports, Foreign Exchange Reserves, External Debt, and Interest Rates on the Currency Exchange Rates Against the United States Dollar in Southeast Asia Countries. Jurnal Perspektif Pembiayaan Dan Pembangunan Daerah, 9(4), 365–374. https://doi.org/10.22437/ppd.v9i4.12706.
Oberholzer, B. (2023). Managing the Balance-of-Payments Constraint: Dilemmas and Perspectives. In. Sylla, N. S (Ed). Imperialism and the Political Economy of Global South's Debt. Research in Political Economy, 38, 165–191.
Onwuka, I. (2022). Budget Deficit, Inflation and Economic Growth in Nigeria: An Empirical Analysis. International Journal of Economics and Financial Research, 81, 1–14. https://doi.org/10.32861/ijefr.81.1.14.
Prah, D., & Tenakwah, E. J. (2017). Impact of Government Domestic Borrowing on Interest Rate. International Journal of Advanced Research and Development, 2(5), 86–90.
Pramudita, N. D., & Ivander. (2022). The Impact of Macro Economic Factors on the FED Funds Rate in South East Asian Emerging Markets. International Journal of Economics and Finance Studies, 14(1), 340–357. https://doi.org/10.34109/ijefs.20220015.
QASEEM, F. I. (2024). Monetary Policy Dynamics and Economic Growth: An Empirical Analysis of Indonesia’s Economy using Time-Series Data and Error Correction Model (ECM). Cognizance Journal of Multidisciplinary Studies, 4(3), 284–303. https://doi.org/10.47760/cognizance.2024.v04i03.026.
Rajković, M., Bjelić, P., Jaćimović, D., & Verbič, M. (2020). The Impact of the Exchange Rate on the Foreign Trade Imbalance during the Economic Crisis in the New EU Member States and the Western Balkan Countries. Economic Research-Ekonomska Istrazivanja, 33(1), 182–203. https://doi.org/10.1080/1331677X.2019.1708771.
Sabado, J. R. F. (2023). Determinants of Balance of Payment: A Comparative Review of Developing and Least Determinants of Balance of Payment Fluctiations in The Philippines:1981-2019. European Journal of Economic and Financial Research, 7(1), 1-31.
Sanusi, A. R. (2022). Fiscal Constraints and Economic Development: Policy Options in Times of Fiscal Crises. The 63rd Annual Conference of the Nigerian Economic Society (NES).
Saqib, A., Chan, T. H., Mikhaylov, A., & Lean, H. H. (2021). Are the Responses of Sectoral Energy Imports Asymmetric to Exchange Rate Volatilities in Pakistan? Evidence From Recent Foreign Exchange Regime. Frontiers in Energy Research, 9, 614463.
Şen, H., Kaya, A., Kaptan, S., & Cömert, M. (2020). Interest Rates, Inflation, and Exchange Rates in Fragile EMEs: A Fresh Look at the Long-Run Interrelationships. Journal of International Trade and Economic Development, 29(3), 289–318.
Sharaf, M. F., & Shahen, A. M. (2023). Does External Debt Drive Inflation in Sudan: Evidence from Symmetric and Asymmetric ARDL Approaches. Journal of Business and Socio-Economic Development, 3(4), 293–307. https://doi.org/10.1108/jbsed-03-2023-0023.
Silvia, E., Sihotang, N. V., Sihotang, D., & Silvia, E. (2023). Causality Analysis of Inflation and Economic Growth Using the Error Correction Model ( ECM ). Indonesia Accounting Research Journal, 11(1), 23–36.
Sumba, J. (2023). Fiscal Deficit Financing and Inflation in Sub-Saharan Africa. (Unpublished Thesis). University of Embu.
Truong, L. D., & Van Vo, D. (2023). The Asymmetric Effects of Exchange Rate on Trade Balance of Vietnam. Heliyon, 9(4), e14455. https://doi.org/10.1016/j.heliyon.2023.e14455.
Wanyama, H. N., Byaruhanga, J., & Ngala, C. (2020). Effect of External Debt on Real Estate Investment in Kenya. Journal of Finance and Economics, 8(4), 183–189.
World Bank. (2023). Inflation of Indonesia. Washington, DC: World Bank.
World Bank. (2023). Exchange Rates Official of Indonesia. Washington, DC: World Bank.
Wray, L. R., & Nersisyan, Y. (2020). Does the National Debt Matter? Japanese Political Economy, 46(4), 261–286. https://doi.org/10.1080/2329194X.2020.1867586.
Yusnaini, Y. (2023). The Effect of Inflation Rate and Foreign Exchange on Company Value at Bank Mandiri Tbk. RIGGS: Journal of Artificial Intelligence and Digital Business, 1(2), 45–50. https://doi.org/10.31004/riggs.v1i2.58.
Yusuf, A., & Mohd, S. (2021). The Impact of Government Debt on Economic Growth in Nigeria. Cogent Economics & Finance, 9(1), 1946249. https://doi.org/10.1080/23322039.2021.1946249
Zahra, A., Nasir, N., Rahman, S. U., & Idress, S. (2023). Impact of Exchange Rate, and Foreign Direct Investment on External Debt: Evidence from Pakistan Using ARDL Cointegration Approach. IRASD Journal of Economics, 5(1), 709–719. https://doi.org/10.52131/joe.2023.0501.0110.
Zaman, M., Pinglu, C., Hussain, S. I., Ullah, A., & Qian, N. (2021). Does Regional Integration Matter for Sustainable Economic Growth? Fostering the Role of FDI, Trade Openness, IT Exports, and Capital Formation in BRI Countries. Heliyon, 7(12), e08559. https://doi.org/10.1016/j.heliyon.2021.e08559,
DOI: 10.15408/sjie.v13i2.42464
Refbacks
- There are currently no refbacks.
