External debt rises, current account deficit widens

Several of the country’s external sustainability indicators have weakened, as reflected in a widening current account deficit and rising external debt and external debt-to-gross domestic product ratio. The development is not entirely unexpected, as the government has signaled a greater willingness to rely on debt financing to support its growth agenda.

The concern, however, is that the increase in external debt is occurring alongside a sharp deterioration in the current account, which moved into deficit in the fourth quarter (Q4) of 2025 and has since widened further. If this trend persists, particularly if larger current account deficits are increasingly financed through debt-creating inflows, Indonesia’s external financing needs could rise, potentially increasing pressure on future debt servicing.

Indonesia’s current account deficit reached a staggering US$12.5 billion in the Q2 2026, or around 3.3 percent of GDP. This marked a sharp deterioration from the previous quarter, when the deficit stood at $3.6 billion, or 1.0 percent of GDP. The Q2 2026 deficit was also the largest nominal quarterly current account deficit in the available Bank Indonesia series since Q1 2004, surpassing the previous peak of around $10.1 billion recorded in Q2 2013.

The scale of the deterioration is particularly striking in terms of how quickly it occurred. Within just three months, the deficit widened by approximately $8.9 billion, more than tripling from the first quarter. As a result, the current account deficit-to-GDP ratio rose sharply this year from 0.97 percent in the first quarter to 3.34 percent in the second quarter. Bank Indonesia (BI) attributed the deterioration to a wider oil and gas trade deficit amid higher oil prices, a narrower non-oil and gas trade surplus as imports increased and a larger primary income deficit.

External debt nevertheless continued to increase, reaching $453.4 billion in the second quarter, up 4.4 percent year-on-year (yoy). The increase was driven by higher public sector external debt, including government and central bank liabilities, while private sector external debt continued to contract, albeit at a slower pace.

Government external debt rose 2.9 percent yoy to $216.3 billion, while private sector external debt declined 0.6 percent yoy to $194.6 billion. BI characterized the increase in government external debt as relatively contained, noting that its growth had moderated from 3.8 percent yoy to 2.9 percent in the first and second quarters, respectively.

However, the pace of nominal debt growth does not provide a complete picture of the external debt burden. Indonesia’s external debt-to-GDP ratio increased from 29.6 percent in Q1 to 30.6 percent in Q2, indicating that external debt grew faster than nominal GDP over that period. BI also noted that long-term debt accounted for 82.1 percent of total external debt, which helped limit near-term rollover risks.

Indonesia’s greater reliance on debt financing had been foreshadowed by recent statements from Finance Minister Purbaya Yudhi Sadewa. He said the government debt burden remained manageable, citing a government debt-to-GDP ratio of around 40 percent, well below the 60 percent ceiling under the fiscal framework. He also pointed to Singapore and Japan, which had substantially higher government debt-to-GDP ratios at 175 percent and 275 percent, respectively.

These comparisons provide limited grounds for assessing Indonesia’s external debt capacity, however, as Singapore and Japan operate under fundamentally different external and financial conditions. Singapore has exceptionally large foreign reserves and substantial sovereign assets, while its high gross government debt reflects a distinctive fiscal and financial system in which government borrowing is matched by substantial financial assets and is not used primarily to finance fiscal deficits. Japan, meanwhile, has a deep domestic savings base and a government debt structure that is predominantly domestically financed.

A higher debt-to-GDP ratio by itself does not determine external debt sustainability. The ability to service external debt depends not only on the size of the economy but also on the country’s capacity to generate foreign exchange, maintain adequate reserves and secure sustainable sources of external financing to meet future foreign currency obligations. The rupiah’s depreciation can further increase the domestic currency cost of servicing foreign currency debt. These factors are particularly important when assessing external debt, because GDP alone does not measure a country’s capacity to generate foreign exchange.

More broadly, external borrowing is easier to sustain when an economy has a stable external position and sufficient capacity to absorb additional liabilities. That is a different environment from one in which the government is simultaneously pursuing an ambitious growth agenda that requires substantial financing while the current account moves deeper into deficit.

The issue, therefore, is not whether Indonesia can mechanically sustain a higher debt-to-GDP ratio but whether its foreign exchange earnings, reserves and capital inflows can keep pace with the external obligations created by additional borrowing. With the current account deteriorating sharply, that question is becoming increasingly important.