Few technical details are available so far, as presidential and ministerial regulations have yet to be enacted to guide the operation and management of the LPI, but Finance Minister Sri Mulyani Indrawati says the LPI will consist of development and stabilization funds.

Sri Mulyani said the government would immediately increase the LPI capital fivefold to $5 billion, of which $2 billion would be in cash (state budget) and the remaining $3 billion in shares of state-owned enterprises (SOEs) and other state assets.

As a former managing director of the World Bank, she should have sensed a positive international market reaction to such a huge investment fund, which is why the government seemed so optimistic that the LPI would be able to attract $15 billion investment from the United States, Japan and the Gulf.

The billion-dollar question, nevertheless, is whether the international market could have confidence in an SWF launched by a government with relatively high corruption, a fiscal deficit and oil deficits, a tax ratio of less than 11 percent and heavy domestic and foreign debt burdens.

Last year, the Transparency International Corruption Perceptions Index ranked Indonesia 40th on its scoreboard of 180 countries surveyed, ranging from 0 (highly corrupt) to 100 (very clean).

The omnibus law stipulates that the LPI aims at optimizing asset value in the long-term as part of efforts to support sustainable development. The LPI will answer to the President, and its board of directors will be appointed by a five-member supervisory board, which in turn is appointed by the President. The finance and SOEs ministers will serve ex-officio on the LPI supervisory board, alongside three professionals.

The positive point, though, is that all major credit rating agencies, including Standard & Poor’s (S&P), Moody’s and Fitch, have upgraded Indonesia’s sovereign credit to investment grade, though still at the lowest rank of their investment grade classifications.

It remains difficult to classify the LPI into one of the three most popular kinds of SWF currently prevailing in the international market: 1. Natural resource funds, such as those launched by Norway, Abu Dhabi and Kuwait; 2) Foreign exchange reserve funds (China and Singapore) and 3) Pension reserve fund funds (Australia, New Zealand and Singapore).

The LPI certainly does not fall in the first category, which draws its endowments from exports of natural resources (notably oil and gas), as Indonesia has been a net oil importer with a steadily increasing deficit since 2004.

Nor does it fit into the foreign reserve funds category of balance of payments surpluses. Although Bank Indonesia has steadily increased its foreign reserves, most of them are short-term portfolio funds, and they are needed to maintain the rupiah’s exchange rate stability. 

As the state budget has steadily suffered a deficit and will likely be in the red at least for the next five years, the Indonesian SWF does not belong to the third category either.

Since SWFs are long-term investors, the market confidence in the LPI will depend primarily on Indonesia’s record of political and economic stability, public-sector governance and transparency and accountability of the fund-raising and management.

In terms of political stability, Indonesia has been impressive, especially after the democratization of the political system in 1998.The risks of unexpected adverse political changes that may affect the value of economic assets are reasonable.

But we should admit that, when it comes to public-sector governance, transparency and accountability, Indonesia is still internationally perceived as notorious.

The credit rating agencies, which periodically assess Indonesian sovereign risks, have taken political risk into account by looking at such factors as the level of democratization, the concentration of decision-making, the incidence of corruption and the independence of the judiciary. Unfortunately, Indonesia does not score well in the latter two because of the high incidence of corruption and poor governance at most SOEs.

Certainly, as the LPI will seek to raise funds from the international market, it must be managed strictly under the 2008 Generally Accepted Principles and Practices, issued by the International Working Group of SWFs, commonly called the Santiago Principles of SWFs.

These principles, which were drawn up at the initiative of the International Monetary Fund, assess many factors. Primary among them are the country’s political ability to confront growing public-sector indebtedness and the willingness of its citizens to accept fiscal austerity.

Other factors assessed for the market value of LPI assets include the structure of the fund, links to the government’s fiscal policy and whether the fund is independent from a country’s international reserves; the governance of the fund and accountability and transparency of the fund in its investment strategy, investment activities, reporting and audits.

In light of the notorious governance within the entire government (executive, legislative and judiciary), the plan on the establishment of an Indonesian SWF seems premature. We still wonder why the Job Creation Law, already so overcrowded with so many lofty goals, was still overloaded with the SWF idea at a time when the economy is mired in a deep recession and the global economy remains fraught with uncertainty as nobody knows when the pandemic will end.

We cannot help but be apprehensive about the government plan to put such a huge fund at stake after observing the scandal plaguing the 1MDB Malaysian multibillion dollar SWF by politicians, businesspeople and foreign bankers.

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Senior editor at The Jakarta Post

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