Jakarta: An unprecedented accumulation of power in Indonesia’s corporate landscape is fuelling investor concern about political influence and transparency in South-East Asia’s biggest equity market.
Newly launched sovereign wealth fund Danantara – which has a direct reporting line to President Prabowo Subianto – announced last month it would take over management of seven state-owned enterprises.
Its holdings include three of the nation’s biggest banks, with total assets of more than US$340bil.
Worries about the deal sent shares tumbling by the most in weeks, pressuring a stock market that’s already one of the world’s worst performers this year.
While sovereign wealth funds are commonplace across Asia, the swift consolidation of assets is offering investors an early glimpse into Prabowo’s vision for economic governance just months after he took office.
The fund would control firms that make up more than one-fifth of the benchmark Jakarta Stock Exchange Composite Index (JCI).
Plans for Danantara to eventually take in all of the dozens of state-owned firms would mean direct control of assets equalling roughly half of the country’s gross domestic product.
Wary investors
“Uncertainty over the new government’s policies, in particular the formation of Danantara, could keep investors away for now,” Selvie Jusman, an analyst at Morgan Stanley, wrote in a recent note.
The upheaval comes at a critical time. Since hitting a fresh record in September, Indonesia’s US$700bil stock market has stumbled as a stronger US dollar and global trade tensions send investors fleeing from emerging markets.
The JCI is down 6% this year, underperforming most global peers.
Last month, the rupiah touched a five-year low as a weakening economy drags on the currency.
Danantara, or Daya Anagata Nusantara Investment Management Agency, will have initial capital of US$20bil and eventually have more than US$900bil in assets under management, according to Prabowo, putting it among the world’s largest sovereign wealth funds.
The president has indicated that funding will come from a mix of budget cuts and increased state firm dividends.
The wealth fund is seen as a key tool to help Prabowo achieve his strategic goals and return Indonesia to the 8% economic growth levels it last posted in the mid-1990s.
Authorities are also hoping it will play a secondary role of boosting foreign investments. Danantara did not respond to a request for comment.
For years, investors have lamented that volatile and illiquid stocks have made long-term investments a challenge in Indonesia.
That’s forced global money managers to concentrate their investments into a handful of financial companies, which tend to be larger, have more free float and broader shareholder bases.
Danantara’s entry has suddenly complicated that thesis.
The three banks set to come under the wealth fund’s control – PT Bank Mandiri Persero, PT Bank Negara Indonesia Persero and PT Bank Rakyat Indonesia Persero – are popular investments among money managers thanks to their profitability and low valuations.
Investors worry that any changes in strategy might hurt margins, particularly given a tough year ahead as weak commodity prices hit loan growth.
Prabowo has said that he would boost state-owned enterprises (SOE) dividend payouts to finance Danantara.
Already, foreigners have headed for the exit, offloading a net US$266mil of Mandiri shares in February, according to data compiled by Bloomberg, the most since records going back to 2020.
In total, they’ve sold about US$1.3bil of Indonesian equities on a net basis so far this year.
“Investors are worried about the sustainability of the dividend payout and also will the SOE’s strategy be changed to be less profit oriented,” said Jeffrosenberg Chenlim of Maybank Investment Bank Bhd.
More details would help improve market sentiment, he added. State firms used to be supervised by the State-Owned Enterprises Ministry, while dividends were paid largely to state coffers.
Direct report
Danantara’s operating model is different in that it will receive all SOE dividends and can leverage their assets for funding, including through bond issuance.
A recently revised law means it will report to the president, sidestepping the Finance Ministry and the SOE Ministry.
There are other concerns brewing. Prabowo allies dominate the fund’s management, raising questions about state overreach.
Risks over strategy, capital allocation and possible off-balance sheet spending add to the list of worries, according to Citigroup Inc analysts.
Danantara’s full leadership lineup, including various advisory boards, is still being finalised and should be announced in coming weeks, according to local media.
For now, investors are on a wait-and-see mode, choosing more of a risk-off stance until more details are announced.
“Institutionalising governance and focusing on returns above the cost of capital is the right direction, but how it balances strategic national interests with commercial discipline remains to be seen,” said Mohit Mirpuri, a fund manager at SGMC Capital Pte.
“If done right, it could enhance long-term SOE valuations rather than just extracting dividends. For now, it’s one to watch rather than assume success,” Mohit said. — Bloomberg
