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New Indonesia’s sovereign wealth fund aims to raise US $ 15 billion

Indonesian Finance Minister Sri Mulyani says investors will have the flexibility to invest in several portfolios. (Reuters photo)

JAKARTA (Reuters) – Indonesia’s Finance Minister Sri Mulyani Indrawati told Reuters that Indonesia’s new sovereign wealth fund will provide funds dedicated to the industry in a bid to mobilize $ 15 billion in investment and deepen Southeast Asia’s largest economy’s access to global capital.

The structure, which was outlined in a briefing by senior economy ministers last Friday, has been adopted to attract global investors who have different appetites for risk, return and length of investment.

“They will have the flexibility to invest in various portfolios,” Sri Moliani told Reuters, citing the electricity, roads and health sectors as examples. She said industry-based funds would operate under an inclusive “master fund”, into which investors could pour money.

Indonesia’s new fund supports the goal of the world’s fourth most populous country to be among the five largest economies in 25 years. This ambition has partially hindered Indonesia’s shallow capital markets, increasing reliance on foreign direct investment or, often, borrowing.

“This creates higher leverage that will not be sustainable in the medium to long term,” said Sri Moliani.

Coordinating Minister for Maritime Affairs and Investment, Luhut Pangjitan, said at the press conference that the fund “could change Indonesia in the near future, and how we manage this country.”

Lohut flew to the United States and Japan over the weekend to offer the fund to private equity firms. The fund, which will be known as the Indonesian Investment Authority, will also discuss with the World Bank and the International Monetary Fund.

Indonesia’s young population, abundant natural resources and proximity to the world’s fastest growing region are attractive to investors, but poor infrastructure, red tape and corruption have made some anxious.

The government’s new job creation law, of which the fund is a part, seeks to address some of these concerns, most notably by harmonizing regulations contained in 79 different laws.

Governance is the key

The Indonesia Fund seeks to attract investment to finance infrastructure projects and stimulate economic growth, following the models adopted by countries such as India, Turkey and Malaysia.

But the industry-wide corruption and massive losses implicated in the Malaysian 1MDB fund is an example of what would happen if the fund was mismanaged.

The Indonesia Fund will be managed by professionals and have a supervisory board composed of ministers.

“The more politicized the investment policy, the less likely it is to generate attractive returns,” said a former senior government official.

The former official said that it was not clear the extent of the oversight board’s authority over investment decisions until there were more details about the appointments and how fund managers and the board of directors interact with each other.

Sri Moliani told Reuters it was important for the fund to be “credible”.

The UAE has helped develop the structure of the fund, along with the international financial development arms of the US and Japanese governments, Luhut said.

Sri Moliani said Indonesia will set aside an initial $ 5 billion in cash and stakes in state-owned enterprises (SOEs) to start the fund, which will also manage securitized state-owned assets.

She said the government is currently studying options for tax incentives for investors, including a “tax exemption” or subsidy.

Fawzi Ehsan, former CEO of the Indonesian Deposit Insurance Corporation, warned of the challenges of developing the fund.

“It is not easy because Indonesia suffers from a current account deficit and a ballooning deficit in the state budget, and it still needs foreign exchange reserves at the central bank in order to stabilize the currency,” he said.

“You need to ensure that the institution has clear legal status for investors, including tax incentives, and has a team of fund managers who have a good track record in investing.”

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