Indonesia’s government wants to channel more investment into the country’s infrastructure via private equity and securitised structures, but the local fund management industry needs more expertise to be able to do this.

That is the view of a local fund industry chief interviewed by AsianInvestor, who wants to see the domestic financial market develop more quickly. But Legowo Kusumonegoro, president of Manulife Asset Management Indonesia, conceded that domestic regulators have various related issues to resolve.

For instance, the government is reluctant to allow more domestic capital to flow offshore, a move that might encourage more foreign flows onshore. As a result, a plan to remove the 15% cap on foreign investment for conventional (non-sharia) mutual funds has been delayed until at least the second half of this year.

INFRASTRUCTURE SHORTFALL

Kusumonegoro said: “Indonesia is at the stage where we need money, we need investments for infrastructure. We need to allocate all these third-party funds into longer-term investments for development projects, creating the environment for long-term growth.”

The country is looking to attract domestic and foreign investors to fund an estimated $450 billion infrastructure development programme that is seen as the basis for its future economic development.

President Joko Widodo came to power in late 2014 seeking to support economic growth through public spending, infrastructure development and the encouragement of investment from public and private sector.

But finance minister Sri Mulyani Idrawati has said the financing needs for the programme cannot be met entirely by state funds. Hence the move to attract private capital.

Indonesia has averaged robust GDP growth of 5.28% since 2000, posting 5.06% last year, yet the development of its financial markets has been slow compared to regional rivals such as Malaysia and Thailand.

The penetration rate for mutual funds is particularly poor, with only 600,000 mutual fund investors in a country of 260 million people.

EYEING RULE CHANGES

Kusumonegoro said domestic fund managers have been in discussion with the Indonesian securities watchdog about how to boost the industry’s assets under management.

“The regulator is looking to find ways to loosen up the rules on fund structures, to allow securitisation and getting more options on alternatives investments,” he noted. “At the same time we are encouraging offshore investors to come to Indonesia.”

Historically, high interest rates in Indonesia have provided little incentive for domestic investors to look beyond bank deposits, but the situation has changed.

The benchmark repo rate now stands at 4.25%, having stood at more than 6% – often well above that figure – for years until early 2016. Hence people are looking at alternative places to park their money, said Kusumonegoro.

The mass-affluent market is not a significant source of funding, he noted, but high-net-worth investors are likely to be urged to invest in domestic infrastructure bonds and private equity funds.

"My sense is the priority [of the government] is to get wealthy investors and institutions to support [local] private equity and to invest in longer-term instruments rather than opening up the offshore [investment] market.”

Kusumonegoro added: “We have some state-owned companies issuing bonds, and the regulator is promoting private equity funds to help finance this infrastructure development.”

SLOW MARKET DEVELOPMENT

But none of this is happening fast enough, he said. “Most institutional investors still prefer to buy lower-risk instruments. Regulators are pushing pension funds and insurers to have more allocation to sovereign bonds. To go to the next level and push the institutions to invest directly into investments will take some time.”

As AsianInvestor has reported, the local asset management industry needs to up its game to cater to this trend.

“My sense is most of the big fund houses [in Indonesia] will need to upgrade their capability to be able to invest in private equity and at the same time promote these investments to local investors as well as offshore investors,” said Kusumonegoro. “That is a challenge for the next five to 10 years.”

Indonesian mutual funds can only invest up to 15% in offshore markets, although that restriction does not apply to sharia-compliant mutual funds, which since 2016 have been allowed to invest up to 100% offshore. There are not that many sharia-compliant assets available domestically, which is why funds have been allowed greater freedom to go offshore, said Kusumonegoro.

He said the regulator had considered removing the offshore investment restriction for conventional mutual funds last year but has put the move on hold until the second half of this year at the earliest.

“The regulator’s view is that if we open up the offshore market, domestic funds will flow outside Indonesia,” Kusumonegoro noted, “at a time when we need the investment in our country.”

He admitted that this offshore investment limit is at odds with the desire to attract foreign capital. “At the back of our minds we know that if you want to invite offshore investment, then the door should be open both ways. But at this point the priority is getting funds invested in Indonesia for the longer term.”

According to the results of a survey conducted by AsianInvestor, in association with Australian asset manager QIC, infrastructure investors want higher returns to compensate for rising interest rates and bond yields and are increasingly turning to actively managed pooled investments. Full results of the survey will be published in the next edition of AsianInvestor magazine.