Indonesia's Unprecedented Power Consolidation Sparks Investor Concerns

The Indonesian corporate landscape is witnessing an unprecedented accumulation of power, fueling investor concerns about political influence and transparency in Southeast Asia's largest equity market. The launch of the sovereign wealth fund Danantara has sent shockwaves through the financial community, with shares tumbling by the most in weeks, pressuring a stock market that's already one of the world's worst performers this year.

The swift creation of Danantara has suddenly complicated long-term investment strategies for global money managers. 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 due to their profitability and low valuations. However, investors worry that changes in strategy might hurt margins, particularly given a tough year ahead as weak commodity prices hit loan growth.

A Mixed Bag of Concerns

The introduction of Danantara has raised several concerns among investors. Firstly, the fact that Prabowo allies dominate the fund's management raises questions about state overreach and potential biases in decision-making. Additionally, there are risks associated with strategy, capital allocation, and possible off-balance sheet spending.

Moreover, the operating model of Danantara is different from previous state-owned enterprises (SOEs), as it will receive all SOE dividends and leverage their assets for funding, including through bond issuance. This new structure has sparked worries about the sustainability of dividend payouts and potential changes in strategy that may prioritize profit orientation over profitability.

A Weakened Economy Drags on Currency

The Indonesian economy is facing a tough year ahead, with weak commodity prices expected to hit loan growth. The rupiah touched a five-year low last month as a weakening economy drags on the currency. Goldman Sachs Group Inc. downgraded Indonesia's stocks to market weight from overweight, citing concerns about weaker earnings, domestic policy risks, and a wider fiscal deficit.

A Tool for Economic Growth

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 that Danantara will play a secondary role of boosting foreign investments.

Investor Sentiment Remains Cautious

For now, investors are in wait-and-see mode, choosing more of a risk-off stance until more details are announced about the fund's leadership lineup and operating model. Institutionalizing governance and focusing on returns above the cost of capital is seen as the right direction, but how it balances strategic national interests with commercial discipline remains to be seen.

"The success of Danantara will depend on its ability to attract foreign capital and improve SOE efficiency," 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."

Key Takeaways

• The launch of Danantara has sparked concerns among investors about political influence and transparency in Indonesia's corporate landscape.
• The operating model of the wealth fund is different from previous SOEs, with potential risks associated with strategy, capital allocation, and off-balance sheet spending.
• A weakened economy drags on the currency, making it a challenging year ahead for Indonesian stocks.
• The success of Danantara will depend on its ability to attract foreign capital and improve SOE efficiency.

What's Next?

The full leadership lineup of Danantara is still being finalized, with details expected to be announced in coming weeks. For now, investors are holding back, waiting for more information about the fund's operating model and strategy before making any investment decisions.

The Indonesian government is hoping that Danantara will play a key role in achieving its strategic goals, including boosting foreign investments and improving SOE efficiency. However, the success of the wealth fund depends on several factors, including its ability to attract foreign capital and balance strategic national interests with commercial discipline.

Institutionalizing governance and focusing on returns above the cost of capital is seen as the right direction for Danantara, but how it balances competing priorities remains to be seen. The wait-and-see approach from investors reflects the uncertainty surrounding the fund's future prospects.