Melihat Indonesia lewat kacamata Ray Dalio: Bagaimana Negara Bankrut

About Ray Dalio’s Book

I just finished reading Ray Dalio’s book titled How Countries Go Broke, which illustrates how nations fall into debt crises. It starts with the premise that the United States is currently facing a massive debt problem, which Dalio sees as entering the final stage of what he calls “The Big Debt Cycle.” This debt problem is driven not only by budget deficits but also by interest rates and inflation—which have remained super low since the 2000s—making debt easy to roll over. Because interest rates were kept so low, the U.S. (and other advanced economies) got too relaxed and addicted to borrowing. But after COVID-19, interest rates in developed countries started rising again, forcing the U.S. to reconsider how sustainable its debt truly is.

Economists like Kenneth Rogoff have already raised concerns about U.S. debt—and so has Ray Dalio, I think. But at a time when low inflation was seen as a bigger problem than high inflation, the debt kept piling up.

I saw a similar way of thinking in Australia, where they’ve been running a current account deficit for over 30 years without any crisis. My macroeconomics lecturer, Timo Henckel, once said this might be risky, but at the time people in Australia weren’t too worried. Timo taught me that we need to be cautious about debt that looks easy on the surface. Politicians tend to make it worse, because increasing spending is how you win elections. That’s why debt discipline only kicks in when it’s already too late.

So has the U.S. left it too late? According to Ray Dalio, not yet. The U.S. can still do what he calls “beautiful deleveraging”—reducing debt in a painless way. That can be done by raising taxes, cutting government spending, and lowering interest rates at the same time. In other words, he believes it’s still doable. But if these steps aren’t taken, the U.S. could face an even worse debt crisis.

The problem is that today’s situation is tangled up with high political uncertainty, both domestically and geopolitically. On top of that, natural issues like the climate crisis and the uncertain effects of technology on the economy make things even more complex. Yup, in his book, Ray also talks about non-debt issues like geopolitical tension and climate-driven risks.

For me, the principle of debt sustainability that Ray Dalio presents isn’t exactly new. Timo had already covered it in his lectures. Even the concept of “beautiful deleveraging” is actually quite standard: it’s when governments and central banks work together—governments reduce debt (by trimming budgets a little and raising taxes) while central banks help out by lowering interest rates. But the way Dalio explains it is so simple and fluid—it’s like the “baby talk” version of macroeconomics class.

I think Ray Dalio is a great example of someone who learned macroeconomics the self-taught way. He’s obviously talked to many macro experts and has hands-on experience as a global investor, which means he had to understand the macroeconomic conditions of all the countries in his portfolio. I really appreciated the examples he gave—of which countries succeeded at beautiful deleveraging and which ones didn’t—it showed how much he’s learned from experience.

---

Applying Ray Dalio’s Indicators

In the book, he shares some indicators and example calculations to assess a country’s debt stability. One of them is the debt-to-income ratio (he says debt-to-GDP can be misleading). You can also use growth-adjusted versions to estimate the present value of debt. Overall, the indicators he uses are actually quite mainstream for investors analyzing economic fundamentals¹.

I tried looking at these indicators too, but went with the easy route—just used historical data without projecting into the future like Dalio did in the book. Mostly because, well… laziness 😆. I used historical data from the IMF dataset Public Finances in Modern History² (which you can access easily here). Since the data layout is kind of messy, I manually merged it in Excel. This dataset contains indicators like:

Code	Description
prim	Primary government spending (% of GDP)
rev	Government revenue (% of GDP)
exp	Government expenditure (% of GDP)
ie	Interest paid on public debt (% of GDP)
pb	Government primary balance (% of GDP)
d	Gross public debt (% of GDP)
rltir	Real long-term gov bond yield (%)
rgc	Real GDP growth rate (%)

Let’s just stick to the basics. First is the debt-to-income ratio. In the table above, debt-to-GDP is labeled “d” and government revenue-to-GDP is labeled “rev”. So to get the debt-to-income ratio, just divide “d” by “rev”—GDP cancels out because it’s in both the numerator and the denominator.

Next, I’ll look at the difference between the interest rate on public debt and the GDP growth rate. If the interest you pay is higher than your revenue growth, then over time, debt becomes more expensive and potentially unsustainable. Now, we’re assuming that as GDP grows, a country’s revenue-raising capacity grows as well—so I’m using GDP growth as a proxy for revenue growth. A bit rough, but still helpful.

Let’s start by looking at the ratio of debt to government income. We’ve got the U.S. and Indonesia in the dataset, as well as Japan, Argentina, and Turkey—three countries that are kind of legendary when it comes to debt crises 😂.

We’re pretty familiar with the 1998 Asian financial crisis that hit Indonesia hard. You can see that Indonesia’s debt-to-income ratio peaked in 1999, when the country’s total debt was 6.7 times its revenue. That’s still better than Argentina, which went through two major crises in 1989 and 2002. Spikes like these are common during crises, when governments ramp up borrowing to stabilize the economy while revenues drop. And yep, there’s a visible spike for all countries in 2020 due to the pandemic.

But for the U.S. and Japan, the debt-to-income ratio has kept rising steadily since their respective crisis moments—Japan since around 1990, and both countries since the 2008 global financial crisis. At this point, it’s no longer a spike—it’s a long-term climb. That’s one of the strengths of issuing debt in your own currency, especially when most of the buyers are your own citizens. In cases like that, the debt ends up being supported by the central bank.

According to Ray Dalio, both the U.S. and Japan have reached what he calls Monetary Policy 3 (MP3): this is when the central bank starts buying government bonds to lower interest rates. That’s what keeps their borrowing costs down and allows debt levels to keep rising. To keep private sector balance sheets healthy, governments (and their central banks) have to sacrifice their own balance sheets. Oh, and by the way—looks like Argentina might be heading for another spike and could need another IMF bailout—for the 23rd time. Wild.

It looks like Indonesia’s ratio started climbing again around 2015 (gee, wonder who was in charge then 👀). But after 2020, the trend seems to be improving, mainly because the primary balance has started shrinking. Primary balance, by the way, is the difference between government revenue and spending excluding interest payments. A negative figure means the government is spending more (on things that drive consumption and investment) than it earns—before even factoring in interest payments.

In other words, a negative primary balance means the government is in expansion mode. A positive value, on the other hand, means revenue has actually surpassed spending. Still, overall there’s a deficit because debt payments need to be covered. Interestingly, in 2023 Indonesia’s primary balance started to turn positive—this means more of the deficit is now being used to repay or roll over debt.

By the way, we can see this low spending trend in the chart below, which shows primary expenditure—that is, total government spending minus interest payments. In other words, this chart reflects the government spending that actually fuels $G$ (government demand). From this, we can see that Indonesia’s debt has remained relatively manageable because government spending itself is relatively low.

What’s more, since the COVID period, the portion of government spending used for actual government consumption (excluding interest payments) has been gradually declining as a share of GDP. This signals that the government has been scaling back its spending—at least in relative terms.

Lastly, looking at the growth-minus-yield figure below, things still seem relatively okay. Indonesia is a country with high bond yields, but its economic growth is also pretty strong. That said, the issues of taxation and ICOR (Incremental Capital Output Ratio) still need serious attention if we want to avoid falling into the trap of unsustainable debt.

TL;DR

In summary, Indonesia still seems to be doing okay in terms of macroprudence—especially when compared to other countries. We issue most of our debt in our own currency (which can be backed by the central bank), which gives us a bit more flexibility. That said, we have to be cautious when comparing ourselves to countries like Japan or the U.S., because they’re in a category of their own. For Japan, we obviously don’t want to end up stuck in a negative interest rate spiral like they did. Investors pulled out, the currency kept depreciating, and young people there ended up in pretty bleak situations. The U.S.? Well, they literally print dollars. Although the dollar’s influence is slowly fading… so, not exactly a perfect scenario for them either.

Indonesia is generally praised for its macroprudence, even though the real sector of the economy is still kind of problematic. We’ve been keeping debt at around 3% of GDP each year—something Ray Dalio also recommends in his book. Our central bank is still holding strong, with foreign exchange reserves currently at an all-time high. As long as we maintain stronger macroprudence than our neighbors, Indonesia will likely remain an attractive place to park money.

Even though our indicators still look solid, we should be mindful of the signs of economic collapse that Ray Dalio talks about. For instance, he mentions that rising authoritarianism is often a red flag for countries heading toward bankruptcy. Then there’s the continuation of monetary policy into “MP3 territory” (meaning both public and private debt ends up being bought by the central bank). And investments that don’t lead to higher productivity? Definitely a red flag too.

About that central bank debt-buying cycle—Ray Dalio outlines a clear pattern in his book. First, the private sector collapses due to reckless debt management (say, construction or aviation firms playing fast and loose with money). Then the government steps in to rescue them—offering contracts or injecting capital. Where does the money come from? More debt. And when no one wants to lend anymore, the central bank swoops in to buy the government bonds in order to keep interest rates from spiking. So the sequence goes: private sector → government → central bank. Eventually, this can go hand-in-hand with a country turning to capital controls.

The real question is: have we reached that stage yet?

Who's buying Indonesia's government bonds? pic.twitter.com/DYR8RKy9ZC

— 🐦 (@dionbisara) March 19, 2025

Alright, that’s all for now. Hopefully, we’ll always stay in good shape, economically and otherwise. Don’t forget to mention me on X if you want to chat further.

---

1. Economists—especially macroeconomists—often argue that indicators used for individual firms don’t really apply to countries. That’s not entirely wrong, but I’ll set that aside for now so this blog post doesn’t go off the rails. ↩︎

2. Mauro, P., Romeu, R., Binder, A., & Zaman, A. (2015). A modern history of fiscal prudence and profligacy. Journal of Monetary Economics, 76, 55–70. https://doi.org/10.1016/j.jmoneco.2015.07.003 ↩︎