INDONESIA INVESTMENT AUTHORITY, The country betting on its new SWF

(Agung Wahyudi/IO)

IO – The Indonesian government’s efforts to break the impact of the Covid-19 pandemic on the economy in 2020 have crumbled, stricken by a recession. In the first half of 2020, the government expected the economy to grow positively, by 1%, but straight contractions from Q2 to Q4 crashed the GDP into negative territory, shrinking by 2.07% for all of 2020. Although the economic shocks caused by the pandemic are also being faced by other countries, the fact is that some countries are able to better weather the recession: for instance China and Vietnam, which grew by 2.3% and 2.9%, respectively.

Amid the ongoing Covid-19 pandemic, a phenomenon that still shows no sign of abating, and a wobbly vaccination pace, the government is again feeling super optimistic that Indonesia’s 2021 economic growth will be around 5%. But with the same sets of problems, it seems like an uphill battle, unlikely the economy can be revived any time soon. Furthermore, household consumption, which accounts for up to 57.66% of GDP, contracted by 2.63% last year and is struggling to climb back to positive territory. Uncertainty surrounding the pandemic, with yet no end in sight and fears of a prolonged economic recession, are also holding back consumption, as people prefer to save extra money for rainier days ahead. This can be seen in the 11.11% rise in savings during 2020.

Apart from weakened consumption, which stalls Indonesia’s economic engine, performance of private investment also worsened in 2020. Private investment, reflected in Gross Fixed Capital Formation (GFCF), is the second-largest contributor to GDP, at 31.73% in 2020. However, due to disruption in the country’s social and economic life, expansion of private investment has hit a brake, causing PMTB in 2020 to contract by 4.95%. The slowdown in private investment actually began to manifest in Q3-2019, where it grew by 4.21%, lower than GDP (5.02%). The pressure on private investment continued to fall to its lowest level in Q2-2020, hitting -8.61%, and carried over to Q3-2020 (-6.48%) and Q4-2020 (-4.95%).

Other evidence that illustrates the still sluggish growth of investment can be seen from Investment Coordinating Board (BKPM) data, where direct investment in 2020 only grew slightly by 2.1% to Rp826.3 trillion, from Rp809.6 trillion the previous year. This was in stark contrast to the 12.2% growth the country enjoyed in 2019. The decline in direct investment was also reflected in the negative growth of foreign direct investment (FDI) which contracted by 2.4% in 2020, a reversal from 7.7% growth in 2019. Even though the share of FDI to total investment mix has always been dominant – 54.44% in 2018 and 52.3% in 2019 – it shrunk to 49.95% in 2020.

Meanwhile, the strengthening of Rupiah and the JCI indicated the trend of foreign investment in government securities has been positive. However, a report from Deutche Bank warns that the potential for a tapper tantrum or reversal of monetary stimulus from central banks in developed countries may happen sooner in 2021, according to around 26% of investors. In 2013, tapper tantrums caused the Rupiah to weaken sharply due to the outflow of foreign capital back to the US. The likelihood that this is happening again will further complicate the government’s efforts to woo direct investment to Indonesia.

Shrinking private direct investment is a formidable challenge facing the government, in its efforts to revive Indonesia’s economy amid the pandemic. This is because it has been a vital source of job creation in Indonesia. Domestic investment and FDI in 2020 were able to absorb up to 1.15 million new workers. The need for new investment is even more pressing, considering that the economic fallout last year made 2.56 million people jobless and pushed the number of poor people to 2.76 million.

The need for private investment, especially FDI, also increases, due to the still high gap between domestic funding capability and the massive pool of funds needed to finance national infrastructure development projects. The budget for infrastructure development in the period 2020-2024 is projected to reach Rp6,445 trillion, which will be covered by State Budget, SOEs, and Public-Private Partnerships (PPP). On the other hand, the State Budget capability to finance infrastructure development is becoming limited amid a decline in tax revenue which shrank by 19.7% in 2020. Not to mention the higher ratio of government debt to GDP triggered by the policy to widen the fiscal deficit to 38.68% at the end of 2020, up from 29.8% in 2019.

While Indonesia’s government debt ratio is relatively low compared to that of other G-20 member countries (US and Japan have a debt ratio above 100% of GDP), developed countries have a robust export structure which increases their ability to pay off their debt. Meanwhile, Indonesia’s debt to service ratio (DSR) has declined due to poor export performance and hard-hit foreign exchange earnings from tourism and remittances from overseas migrant workers. The DSR by the end of 2020 was recorded at 27% or just above the 25% safe limit set by the IMF.

In its response to the economic recovery challenges and the greater need for private investment, the government is taking an extraordinary step by launching the Indonesia Investment Authority (INA), or better known as Sovereign Wealth Fund (SWF). The process was relatively rapid, especially after the ratification of Law No.11/2020 on Job Creation which gives the central government authority to form INA (article 165, paragraph 1). Then the implementing regulations were accelerated in the past year, which yielded among others Government Regulation (PP) No.73/2020 on Initial Capital for INA, PP No.74/ 2020 on Governance of INA, PP No. 49/2021 on Tax Treatment for INA.

Behind the founding of SWF INA aims to increase and optimize investment value in the long term, to support sustained development. The duties of the INA involve planning, organizing, controling and evaluating investments. It has the authority to place funds in financial instruments, manage and administer assets, cooperate with other parties including trust funds, decide on potential investment partners, and provide & receive loans. In exercising its authority, INA can collaborate with investment partners, investment managers, SOEs, government agencies, and/or other entities, domestic or abroad.

To run the fund, President Jokowi has appointed an INA Board of Directors and Supervisory Board. INA Board of Directors is assumed by five professionals, namely Ridha DM Wirakusumah as CEO, Arief Budiman as Deputy CEO, Stefanus Ade Hadiwidjaja as Chief Investment Officer, Marita Alisjahbana as Chief Risk Officer, and Eddy Porwanto as Chief Financial Officer. Meanwhile, the Supervisory Board consists of the Finance Minister, SOE Minister and three professional members, namely Darwin Cyril Noerhadi (2021-2026), Yozua Makes (2021-2025), and Hariyanto (2021-2024). The Supervisory Board will supported by a Secretariat, Advisory Board, Audit, Ethics and Remuneration Committed, Human Resources, etc.

The founding of INA started with Rp15 trillion (US$1 billion) initial capital from the Indonesian government. The capital will be gradually increased to Rp75 trillion (US$5 billion in 2021) as mandated by PP No. 74/2020. Additional capital will be raised through state capital injection and capitalization of INA’s retained earnings. Meanwhile, mandatory capital reserve funds are set to a minimum of 10% of profit. The accumulated retained earnings are invested in accordance with the investment policy. In the event that the accumulated retained earnings exceed 50% of the INA’s capital, the excess can be used as profit-sharing with the government, set at a maximum of 30% of a previous year’s profit and may exceed that rate if approval is granted by the Constitutional Court (MK).

President Jokowi admitted that Indonesia is a latecomer when it comes to establishing SWF as other countries such as the United Arab Emirates, China, Norway, Saudi Arabia, Singapore, Kuwait, and Qatar have had their own SWF for the past 30 to 40 years ago. However, there is a fundamental difference Indonesia’s SWF and those of other countries. Generally, SWFs in other countries were established to manage surplus funds from the country’s revenues. For instance, Norway founded Norwegian Oil Fund to manage its huge oil revenue, with funds under management totaling US$1.099 billion. Likewise, the Singapore government has the Government of Singapore Investment Corporation (GIC) which manages US$440 billion in funds. On the contrary, the SWF established by Indonesia government clearly targets foreign funds to meet its domestic financing needs.

Judging from the experience of other countries, SWF is actually used to invest excess capital or so-called endowment funds. The sources of funds can come from sovereign wealth, which takes up two forms. First, non-renewable natural resources such as oil, gas and minerals. Second, financial assets such as stocks, bonds or securities, precious metals, and other instruments. In other words, a state invests its excess capital through the SWF to gain an even greater return. Indonesia, in fact, has had an endowment fund management agency but it is limited for certain purposes, such as the National Education Development Fund (DPPN), Research Endowment Fund, Cultural Endowment Fund, Higher Education Endowment Fund, and the Indonesian Agency for International Development.

In addition, Indonesia actually has the embryo of SWF in the investment sector called Pusat Investasi Pemerintah (PIP) which is a Public Service Agency (BLU) under the Finance Ministry. However, all of PIP assets were transferred to boost the capital of PT Sarana Multi Infrastruktur (SMI) which is expected to accelerate the provision of funding for various government infrastructure projects. The scope of PIP is also limited because it only manages excess state funds from foreign exchange reserves, which are not too substantial because money must be set aside for international trade.

Through INA, the government hopes to attract larger foreign funds, apart from FDI. President Jokowi himself claimed that there are already five countries that want to invest through INA, namely the US, Japan, UAE, Saudi Arabia and Canada. SOE Ministry Erick Thohir even expressed his optimism that global investors or financial institutions have committed to invest upward to Rp133.69 trillion (US$9.5 billion) through INA.

The government’s effort to realize the investment target can be seen in the intense roadshows to various countries aimed to convince investors. As a result, claimed Coordinating Maritime Affairs and Investment Minister Luhut Pandjaitan, the Canada Pension Plan Investment Board (CPPIB), which manages US$329.75 billion in funds, plans to invest US$2 billion with INA. In addition, the government also claims to have received a positive response from the UAEowned Abu Dhabi Investment Authority (ADIA), which manages US$579.62 billion (Rp8,520 trillion) of assets.

The government will rely on INA as part of its strategy to boost Indonesia’s economic growth in years to come, especially post Covid-19. Amid soaring government debt, the government boasted that INA will become a new source of development funds for Indonesia, so it can rely not just on loans, but also equity.

However, the public is also questioning the urgency of INA.

Is the performance of Indonesian Capital Markets in attracting foreign investors through direct share ownership in public companies not effective enough in funding the capital needs of publicly-listed private corporations and SOEs? Because the government’s justification for INA is that it can serve as an investment vehicle to fund the growth of Indonesian corporations through foreign investment, in the form of equity or share ownership.

Furthermore, the establishment of INA cannot be separated from the attempt to save several SOEs which are currently facing financial pressure from mounting debt. Some of them, like Krakatau Steel, Waskita Karya, PP Properti, Adhi Karya, Jasa Marga even show debt-to-EBITDA and debt-to-equity ratio 3-4 times beyond what is deemed healthy. The ability of SOEs to meet their debt repayment obligation is getting tougher amidst a pandemic-induced business slowdown.

In total, the debt of SOEs in the January-September 2020 period has reached Rp1,682 trillion, a significant rise compared to Rp1,393 trillion in 2019 and Rp1,251.7 trillion in 2018. Likewise, their foreign debt as of December 2020 has hit Rp813.12 trillion (US$58.08 billion). This has caused the debt to GDP ratio to rise to 5.26%. Against this background, it is inevitable that the establishment of INA is seen as a shortcut to save SOEs through a range of strategies such as restructuring, refinancing, and securitization.

INA can save SOEs if it is successful in attracting foreign investors who will finance development projects through equity instead of debt. With this strategy, the company’s debt-to-earning ratio will decrease. However, it must be remembered that saving SOEs through direct ownership of their shares will eliminate their potential revenue in the long term because mature profitable projects can be potentially transferred to INA, which are partly-owned by foreign investors. This means that the SOEs’ ability to generate profits will affect the amount of dividends it can contribute to state coffers in the long run.

Even if the establishment of INA will generate many positive impacts, the government must be careful to anticipate potentially adverse risks in the future. The risk of irregularities or fraud at INA cannot be overlooked in light of the recent mega corruption scandal at Malaysia-owned 1MDB which is now, ironically, saddled with US$11 billion of debt.

The government must ensure that the management of INA doesn’t create any conflicts of interest. Don’t allow INA management to give preferential treatment to certain companies or business groups. The risk profile of each investment portfolio must be objectively identified so that it can be ascertained that its investment will be profitable. Various corruption cases at SOEs or government institutions such as Jiwasraya, Asabri, BPJS Ketenagakerjaan are clear evidence that investment management is prone to irregularities and fraud. Therefore, INA management should be different from that of SOEs, that is free from political intervention because INA is the country’s reputation, which if tarnished by bad actors will undoubtedly destroy the confidence of global investors who have placed their trust in INA.

To mitigate the risk of fraud, INA’s audit should not only be carried out by a public accounting firm, but should also involve the Supreme Audit Agency (BPK) and even the Corruption Eradication Commission (KPK). Moreover, INA’s initial capital came from the state budget ,which is taxpayers’ money that should have been transparently audited by the BPK. In addition, INA must also involve the public oversight by releasing periodic reports or information disclosure, including the amount of profits that INA makes. (Abra Talattov, SE., M.Sc)

Abra Talattov, SE., M.Sc is an economist, graduated from Universitas Diponegoro’s faculty of economics. In 2010 Abra earned a Master of Science (M.Sc) degree from Universiti Malaysia Terengganu. He later joined the Institute for Development of Economics and Finance (INDEF), a think tank, now Head of Food, Energy, and Sustainable Development Center at INDEF. He is also a manager of Economic Development Pillar at SDG Secretariat of the Jakarta Provincial Government since 2019.