Can Indonesia’s Sovereign Wealth Fund Attract Foreign Investors?
Indonesia introduced its first sovereign wealth fund, the Indonesia Investment Authority (INA) in 2021. Unlike other sovereign wealth funds, the INA explicitly seeks foreign co-investors to capitalize on the fund rather than rely on commodity revenues.
The government hopes the INA will attract investments in infrastructure, the digital economy, logistics, the financial sector, tourism, and supply chains, among others.
Indonesia is looking to foreign investors to help build its sovereign wealth fund, in a bold experiment to address the country’s infrastructure needs.
In 2021, the Indonesian government created the Indonesia Investment Authority (INA) – the country’s first and only sovereign wealth fund. The government hopes that the fund will finance much-needed investments in infrastructure and emerging industries, ultimately spurring growth in Southeast Asia’s largest economy.Sovereign wealth funds are state-owned investment funds typically financed by a country’s surplus revenues or reserves. Governments invest these funds in an array of both real and financial assets to stabilize national budgets, create savings for their citizens, or promote economic development.
However, in contrast to most sovereign wealth funds, Indonesia is explicitly seeking foreign co-investors to capitalize the fund rather than rely on commodity revenues. But will the INA be able to attract foreign investors and, ultimately, fix the country’s longstanding infrastructure challenges?
What is Indonesia’s sovereign wealth fund?
Indonesia created its sovereign wealth fund, the INA, in 2021, making it one of the last major emerging economies to create one. President Joko Widodo first announced plans to create the fund in January 2020.
The INA, however, has a key difference from most other sovereign wealth funds. Rather than being financed from Indonesia’s revenues from commodities, the Indonesian government envisions the INA being financed by private investment – including foreign investment. This is despite the fact that Indonesia is a resource-rich country.
The INA has sought to attract direct investments through infrastructure and industry projects, such as investments in transportation, supply chains, logistics, digital infrastructure, the green economy, healthcare services, the financial sector, technology, and tourism. More specifically, this includes investments in airports, seaports, fiber optics, data centers, and the development of Indonesia’s new capital city.
When Indonesia first launched the INA in 2021, the government gave it US$5 billion in funding and announced an ambitious goal of accumulating US$200 billion in assets by 2024. As of late October 2022, the INA was managing US$6.5 billion in assets. It has also attracted over US$20 billion in co-investments from a variety of funds and investors.
To date, investors include Singapore’s GIC, the Abu Dhabi Investment Authority, the Netherlands’ APG Asset Management, Canada’s Caisse de dépôt et placement du Québec, and China’s Silk Road Fund. Others are looking into the possibility of investing in the INA, such as Australian pensions.
The benefits of sovereign wealth funds
Countries with large sovereign wealth funds are often rich in natural resources. This is because such countries often create sovereign wealth funds to mitigate the risks of commodity price fluctuations, as well as to avoid overheating the economy and spurring inflation by immediately spending revenues.
For example, Norway has the world’s largest sovereign wealth fund – worth US$1.36 trillion – owing to its oil wealth. Many other countries that are rich in oil also have world-leading funds, including the United Arab Emirates, Kuwait, Saudi Arabia, and Qatar.More recently, many major emerging economies have established sovereign wealth funds to promote development. Sovereign wealth funds have been popularized among emerging economies in part because they allow governments to strategically orient economic development plans and guide investments in infrastructure that is missing or deficient.
Major emerging economies with sovereign wealth funds include the BRIC countries – Brazil, India, Russia, and China. Two of Indonesia’s neighbors, Malaysia and Singapore, also have sizeable sovereign wealth funds.
Why invest in the INA?
The INA offers unique benefits for foreign investors. The INA facilitates investment pooling, bypassing the limitations of Indonesia’s domestic financial markets, while government backing makes it easier for investors to navigate the country’s bureaucratic and regulatory landscape. Usually, foreign investors face numerous challenges when investing in Indonesia, such as shallow capital markets, high levels of corruption, and complicated bureaucracy, regulations, and red tape.
Investing through the INA mitigates these challenges.
Investors in the INA hope that Indonesia’s market size, young and growing population, and resource wealth will translate into profits. If successful, however, the INA will also bring economic benefits for businesses and foreign investors that are not participating in the fund.
This is because the INA seeks to upgrade Indonesia’s infrastructure and spur economic growth – results that will improve business in the country more broadly. Indonesia’s notorious infrastructure deficit has long been one of the major factors that present challenges to foreign investors and limits the economy’s growth rate.
Acknowledging Indonesia’s economic needs, the government’s “Vision 2045” plan seeks to drastically improve the country’s manufacturing sector and infrastructure. In pursuit of this goal, Indonesia’s budget allocations for infrastructure have increased from 256 trillion rupiah (US$16 billion) in 2015 to 417.4 trillion rupiah (US$27 billion) in 2021.
A key challenge for the INA will be to avoid corruption and politically driven investments; issues that have hampered some other sovereign wealth funds. The most notable case happened in Malaysia, Indonesia’s neighbor, through its notorious 1MDB fund that ultimately led to the ousting and prison sentencing of Prime Minister Najib Razak.
By directing government-backed investments into strategic infrastructure and industries, the INA stands to play an essential role in Indonesia’s economic development. As the fund begins to take shape and investments are carried out, its true potential for addressing Indonesia’s economic needs will become increasingly apparent.
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