Leveraging Indonesia’s sovereign wealth fund

Author: Krisna Gupta, CIPS

Indonesia received a visit from some of Australia’s largest pension fund managers in August 2022. The goal of the visit was the Indonesia Investment Authority (INA), the sovereign wealth fund of Indonesia. This development is welcome as both countries seek to improve economic ties following the 2020 Indonesian-Australian Comprehensive Economic Partnership Agreement (IA-CEPA).

Indonesian Investment Minister Bahlil Lahadalia gestures during a press conference at the Investment Coordinating Board (BKPM) office in Jakarta, Indonesia on January 7, 2022 (Photo: Reuters / Antara Photo).

Australian pension managers aren’t the only ones looking to invest in the Indonesian sovereign wealth fund. The INA has received interest from various fund managers from Canada, the Netherlands and Abu Dhabi. The Australian funds will help INA achieve its goal of managing $ 20 billion from its current $ 28.5 million worth of holdings.

There are several ways that INA can attract more investment to Indonesia. INA facilitates investment pooling, which allows for foreign investment in a country with shallow capital markets. As a government initiative, INA can help investment funds navigate a complex bureaucracy that often undermines Indonesia’s ability to attract funds despite its growing economy and relatively young population.

INA focuses on investments in transport, supply chains and logistics, digital infrastructure, the green economy, health services, the financial sector, consumers, technology and tourism. These are all fast growing and under-invested industries in Indonesia. The INA is also equipped with various privileges, such as preferential rights to purchase assets from state-owned enterprises and a mechanism to ensure that it receives capital injections from the state budget in times of need.

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All these benefits should be enough for the INA to attract more funds. But considering that $ 5 billion comes from the state budget and stocks, $ 28.5 million in external funding is relatively small. The slow growth of the INA suggests that the sovereign wealth fund could overcome Indonesia’s past problems in attracting foreign investment.

The INA is seen by many as Indonesian President Joko “Jokowi” Widodo’s latest attempt to use state-owned enterprises (SOEs) to stimulate growth. The reference sectors of the INA are those in which SOEs play a substantial role. In fact, INA’s first investment was in Mitratel, a SOE telecommunications infrastructure. Jokowi also asked INA to invest in Blok Masela, a government-led natural gas project delayed by the withdrawal of the government’s initial partner, Shell.

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While the INA may strive to manage itself professionally and remain free from political influence, this is by no means guaranteed, especially when considering its investment decisions. The INA’s short-term goal appears to help state-owned construction companies. It’s no secret that Jokowi’s debt-financed infrastructure projects lead to highly indebted state-owned construction companies.

However, infrastructure financing in the past has allowed state-owned construction companies to de-leverage. Jakarta used Akses Pelabuhan Indonesia and Sarana Multi Investasi, both SOEs, to buy assets from Waskita Karya, one of the most leveraged state-owned construction companies. INA is purchasing three more segments of the Waskita Karya toll road to help further reduce leverage.

With declining tax revenues and limited fiscal discipline, SOEs have become Jokowi’s primary vehicle for pursuing its infrastructure investment and energy subsidy goals. Jakarta has already injected approximately $ 24 billion of capital into its SOEs as corporate bond issuance is no longer a viable option. Jokowi has two years to leave a legacy worth remembering: the INA could be the last resort on its state capitalist agenda as its options shrink.

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Using the fund to de-leverage companies could mean SOEs only sell their least profitable businesses to INA. Since the INA can receive a capital injection in the form of SOE shares, these low-yielding assets could be purchased with high-yielding SOE shares. Part of INA’s initial capital injection came from Bank Rakyat Indonesia and Bank Mandiri, two of Indonesia’s most profitable SOEs.

But that kind of capital allocation could undermine the Indonesian government’s profit. There is little reason to think that the government can allocate capital more efficiently than the market.

INA is still a relatively young fund. It is possible that in the long term, deleveraging of SOEs and financing of state growth could be profitable for INA. But even if INA partners help the fund make better investments, it’s best to maintain a healthy skepticism about its future performance.

Krisna Gupta is a lecturer at Politeknik APP Jakarta and an associate researcher at the Center for Indonesian Policy Studies. You have just completed your PhD in economics from Australian National University.

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