March 18, 2021

Asia

INDONESIA: Why the sovereign wealth fund could punch well above its weight

BY Bob Herrera-Lim

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( 5 mins)
  • The new sovereign fund will have a modest capitalization initially, but its investment priorities will signal the government’s priorities.
  • Whether the fund will evolve into a politically-directed entity or an effective catalyst for foreign and private investment is the main question.
  • Aside from President Joko Widodo and Finance Minister Sri Mulyani, the key policymaker to watch is State Enterprises Minister Erick Thohir, who has significant ties to Indonesian conglomerates.

Later this year, Indonesia plans to formally launch its sovereign wealth fund, the Indonesia Investment Authority (INA), patterned after other sovereign investment structures such as India’s National Investment and Infrastructure Fund (NIIF). Since Indonesia does not have surpluses, its initial goal is to infuse USD 5bn into INA. The initial USD 1bn was allocated through the 2020 budget, and another USD 1bn will come from the 2021 budget, with the rest possibly being in the form of a transfer of shares of SOEs or other state assets. Other entities that have reportedly pledged amounts so far include the Japan Bank for International Cooperation (JBIC), United States International Development Finance Corporation, Dutch pension fund APG, and Canadian pension fund CDPQ.

However, the INA’s influence on — or signaling of — Indonesian government priorities could be disproportionately larger than its dollar size because of policymakers’ view of its role and the politicians and cabinet members driving Indonesian economic policy.

The fund, whose creation is mandated by the Omnibus Law on Job Creation that came into force last November, is an extension of President Joko Widodo’s economic reform agenda and is therefore meant to drive investment into high-profile projects. Without INA, the challenge for the government is that its fiscal space for infrastructure spending will likely be constrained the next few years, first by its commitment to restore by 2023 its deficit cap of 3% of GDP, and by the high debt loads of many of its largest state enterprises.

Initially, according to the state enterprises’ ministry, INA’s priority is likely to be connectivity projects such as toll roads, airports, and seaports. These could include the toll road projects of state firms PT Waskita Karya, PT Hutama Karya, and PT Jasa Marga — all heavily indebted state firms. Other projects such as digital infrastructure, healthcare, and tourism are being considered. INA has a wide enough mandate to invest across a wide range of sectors and through various funding mechanisms, whether through its own master fund or by participating in third-party funds.

The politics of INA

But INA will also function within the broader context of the influence of key policymakers in his cabinet. One locus will be Widodo and Finance Minister Sri Mulyani Indrawati, who both recognize the need for the fund’s management to have credibility with markets and investors. She will have the additional role of tempering the president’s political agenda. Based on the law, the fund is directly responsible to the Indonesian president, with the two-tier board common in Indonesia. Its supervisory board will have both the finance and state enterprises minister, which reasonably assures that problems affecting INA’s operations or its investment will have high-level policy visibility.

But it may also draw attention to another group: the networks that intersect with state enterprises minister Erick Thohir, who could have the most significant influence on INA after Widodo and Sri Mulyani. Erick is the son of Teddy Thohir, who formed Astra International, the country’s largest automotive and motorcycle dealership. His brother, Garibaldi, controls PT Adaro, Indonesia’s second-largest coal miner.

Erick’s main business before entering government was Mahaka Media, a diversified media and entertainment company, which he co-founded with his childhood friend Muhammad Lutfi, a former trade minister in the Widodo government and now ambassador to the US. Erick’s other prominent media investment was Viva, in partnership with the family of Aburizal Bakrie of the Golkar party. Thohir was active in the mid-2000s in the Indonesian Young Entrepreneurs’ Association (HIPMI), at the same time as Sandiaga Uno, who is now the minister for tourism and creative economy. The organization is a key nexus. Uno is closely associated with the Soeryadjaya family, who co-founded Astra with Teddy Thohir and partnered with Garibaldi at Adaro. Another Thohir friend from high school is Rosan Roeslani, the chair of the Indonesian Chamber of Commerce (Kadin), who together with Sandiaga Uno set up the private equity firm PT Recapital Advisors soon after the Asian financial crisis.

These officials, many western educated and used to dealing in their private capacity with foreign investors, may represent a slightly more positive picture of the next cohort of political and business entrepreneurs to influence Indonesian policymaking. On the other hand, however, they are also used to internal maneuvering and patronage politics that have defined Indonesian economic policymaking and may believe directed investment and national champions to be the way forward. INA may therefore signal the direction in which they are taking the country.

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