1. The Debt Cycle and Its Implications
Ray Dalio’s debt cycle theory holds true across time:
In understanding economic conditions, the role of debt cannot be overstated, as it influences both corporate and consumer behavior.
Credit expands → Over-leverage → Interest rates rise → Deleveraging → Collapse or rebalance.
We saw it in:
- 2008 (Lehman)
- 2019–2020 (Covid liquidity wave)
- Now (2023–2025 tightening)
Today, debt levels are unsustainable—especially in the U.S., where:
- Debt-to-GDP has hit 122%
- Government interest payments now exceed $1 trillion annually
This points to a painful deleveraging ahead—but the timing and magnitude remain unclear
2. The Risk of Business Bankruptcies and Corporate Debt
Global Debt Comparisons
To provide a broader context, here’s how the U.S. compares with other major economies in terms of debt-to-GDP ratio:
Many businesses, particularly startups and PE-backed companies, face funding challenges. With interest rates staying high, companies without strong cash flow are likely to go bankrupt. With rising interest rates, businesses that relied on cheap debt are at risk.
The key metrics to determine “how high is high” for debt include:
3. Where Deleveraging Might Be Coming
Deleveraging is a process where excessive debt is reduced, either through defaults, restructuring, or economic contractions.
Given current conditions, deleveraging might occur in:
- Highly leveraged corporations – Companies with unsustainable debt loads, particularly in sectors like commercial real estate, technology, and private equity-backed firms.
- Startups and venture-backed businesses – With funding drying up, many will be forced to shut down or be acquired at lower valuations.
- State-Owned Enterprises (SOEs) in Indonesia – Companies in aviation, energy, and infrastructure sectors could struggle to manage their high debt burdens.
- The U.S. and global bond markets – As debt issuance continues, higher yields might force a painful adjustment in fiscal policies.
4. Indonesia’s Deleveraging Cycle: A Strategic Framework for Analysis
Phase 1: Recognition (Current Phase – 2025)
- First signs of deflation appear, signaling weak demand.
- Asset prices (housing, stocks) decline due to lack of credit expansion.
- Companies and consumers begin prioritizing debt repayment over new investments.
Phase 2: Balance Sheet Repair (2025-2026)
- Banks restrict lending, leading to slower credit growth.
- Businesses and individuals cut unnecessary expenses and focus on financial stability.
- Government policy may shift towards targeted stimulus to counteract economic slowdown.
Phase 3: Liquidity Injection & Recovery (2026-2027+)
- Once debt levels stabilize, central banks may cut rates to stimulate borrowing.
- Government fiscal policy shifts to more aggressive spending to drive growth.
- Credit expansion resumes, restarting economic momentum.
5. Defensive Sectors as the Winners
In this environment, defensive sectors with guaranteed cash flow are expected to outperform:
- Consumer Staples (food, healthcare, essential retail) – Stable demand, pricing power.
- Utilities (electricity, water, gas, telecoms) – Essential services with government support.
- Industries that are not debt-fueled – Companies with strong free cash flow will be resilient.
6. The Problem with Private Equity (PE) Firms
Many private equity firms will struggle because they:
- Used excessive leverage in a low-rate environment.
- Faked “value creation” by aggressive cost-cutting instead of genuine business improvement.
- Face exit problems as IPO markets weaken and corporate buyers hesitate.
However, the PE industry’s downturn presents an opportunity. A well-managed PE firm that focuses on true value creation, strong capital allocation, and long-term investments can dominate while others collapse.
7. Strategic Playbook: How to Navigate Indonesia’s Deleveraging Cycle
For Investors:
- Diversify into short-term government bonds with high credit ratings to mitigate risk.
- Look for undervalued assets—such as real estate or equities—where prices have overcorrected due to deleveraging pressures.
- Reduce exposure to highly leveraged sectors like private equity and commercial real estate, as their valuations may decline further.
- Increase holdings in defensive sectors such as consumer staples, healthcare, and utilities for stability during uncertainty.
- Monitor global monetary policy shifts to anticipate when liquidity might return to markets.
For Businesses:
- Refinance debt structures by shifting from variable-rate loans to fixed-rate alternatives to avoid future interest rate shocks.
- Preserve capital by accelerating cash flow strategies—shortening accounts receivable cycles while delaying non-essential expenditures.
- Adopt lean operations, prioritizing core business strengths instead of overexpansion in uncertain financial conditions.
- Explore strategic partnerships for operational efficiency and cost-sharing to navigate financial constraints.
- Focus on profitability over growth, avoiding risky expansion in a deleveraging cycle.
For Policymakers:
- Implement selective stimulus programs that support critical industries while avoiding excessive fiscal risk.
- Encourage financial restructuring initiatives to prevent widespread corporate defaults.
- Ensure monetary policy remains flexible to adapt to changing economic conditions.
- Incentivize foreign direct investment (FDI) into sectors that can drive sustainable, long-term growth.
8. Final Thought: Is Indonesia’s Growth Model Changing?
Indonesia has historically relied on credit expansion and consumer-driven growth as the backbone of its economy. However, with deleveraging underway, a shift toward an investment-led model may finally take shape.
Key transformations to watch include:
- Greater emphasis on FDI-led growth → With reduced domestic borrowing capacity, Indonesia may lean more heavily on foreign direct investment to fund long-term expansion.
- Industrial diversification → Policymakers are likely to push for more manufacturing, logistics, and infrastructure investments to lessen reliance on commodities and consumption.
- Government-backed productivity initiatives → Expect stronger support for business efficiency, workforce upskilling, and technology adoption to offset the slower pace of credit expansion.
- Stronger regulatory frameworks → As liquidity tightens, Indonesia may strengthen its financial supervision to avoid systemic risk and ensure debt sustainability.
- The role of Danantara → This is where Danantara must evolve—not just as a holding company, but as a sovereign capital architect that channels long-term strategic investment. → If designed well, it can bridge the gap between FDI, public funding, and national priorities—ensuring that capital flows are not just large, but intelligent.
If Indonesia successfully navigates this transition, it could emerge with a more resilient, self-sustaining, and strategically allocated economic model—reducing its vulnerability to future credit cycles and global financial shocks.