Plans for Indonesian state fund whetting asset manager appetite

The country's planned sovereign fund is seen as a way to channel investment more efficiently and make local SOEs more efficient, but foreign asset managers could lose business to local players.
Plans for Indonesian state fund whetting asset manager appetite

Indonesia’s planned state investment firm will be good for the local funds industry and corporate governance, but could take business away from foreign asset managers, according to a local executive.

Jemmy Paul Wawointana, chief investment officer at Sucorinvest Asset Management, also said the proposed sovereign entity would have a positive effect on the country’s state-owned enterprises (SOEs), encouraging more efficient management and reducing corruption among officials.

While Indonesia's GDP growth over the last 10 years is second only to that of China and India (averaging more than 5% annually), the development of its financial markets has been relatively slow compared to regional rivals such as Malaysia and Thailand.

As part of the necessary reform process, the Indonesian government is considering forming an investment company that would combine various state entities under one holding company, with a view to investing in domestic corporates and infrastructure projects. Ultimately, the fund is expected to also invest overseas.

Wawointana runs a $300 million domestically invested fund that is hoping for opportunities to invest in or with SOEs, such as into infrastructure, as a result of the state fund being set up. “It will help [SOEs] become more profit-centric and will improve their operations, in the same way as happened in Singapore [as a result of investments by state funds GIC and Temasek].”

He said he was excited by the opportunity for local asset managers to be involved in these investments, but noted that overseas players were less optimistic. “I talk to fund managers from Singapore, and they said it’s going to be good for Indonesian fund managers, but a challenge for them [the Singaporean players].”

Some of the projects are currently backed by Singaporean and Malaysian companies, but they could be eliminated by the funding supplied by the local sovereign fund, noted Wawointana.

But it could also be an opportunity for them to set up joint ventures with the SWF, he said: “Usually the local partner wants the foreigners to suffer if they want to invest, so it will depend on the terms of the JV.”

Aside from the dominant role of domestic banks in providing funding, there is significant foreign participation in Indonesian markets, partly driven by the limited asset base of domestic institutions, said management consultancy Oliver Wyman in a 2015 report on Indonesia.

But there is a shortage of genuine long-term investors in Indonesia, the report noted, quoting a multilateral agency executive stating that the country's pension funds “don’t act as long-term investors as they have a short-term return mindset".

The development of a holding company of Indonesian SOEs has widespread support, but getting it up and running will not be easy, Wawointana suggested.

For one thing, the country doesn’t have a big supply of qualified managers. “They will have to bring people in from outside because they don’t have the experience in Indonesia,” he noted. “I see a lot of private company directors going to work at the SOEs, which is good. But they will need outside help.”

Wawointana said he hoped funding for the new SWF would go into infrastructure and that the entity would limit the amount of capital ‘leakage’. “Sometimes only 40% of the funding gets to where it ought to go, but the government is working to limit the corruption.”

Still, he is upbeat about the potential impact of the plans. “The Indonesia sovereign wealth fund should be great, because it’s a sign that finally the government wants to run the SOEs more professionally,” said Wawointana.

Indonesia’s finance minister, Bambang Brodjonegoro, has said the country needed to become less reliant on commodity revenues and domestic consumption and build up a strong domestic manufacturing and services base.

The SOEs in the new umbrella company would include energy and plantation firms. Wawointana’s previous experience of dealing with SOE directors in the country has led him to question their business ethics.

“What I learned is there is a lot of corruption,” he noted. “But there’s light at the end of the tunnel; the sovereign wealth fund will be professionally run and will probably reduce the level of corruption. Their operations will be scrutinised more than before.”

There has been a marked improvement in Indonesia’s business environment in the last three years, says Wawointana, much of which has to do with the influence of President Joko Widodo and his administration encouraging greater professionalism.

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

“He’s a humble guy and he’s setting up proper funding for projects, proper governance and has overseen the appointment of key people to run them,” said Wawointana.

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