Complex Made Simple

The UAE pours billions into Indonesia’s sovereign wealth fund

The United Arab Emirates will invest $10bn in Indonesia’s new sovereign wealth fund (INA) to be spent on projects inside Southeast Asia’s biggest economy, including toll roads

Jakarta will seed the fund with over $6bn in cash and other assets There were more than 90 SWFs with combined assets amounting to nearly $8.2 trillion dollars in 2020 The INA may invest in both private sector- and SOE-led projects, and has the authority to both lend and borrow

The United Arab Emirates will invest $10bn in Indonesia’s new sovereign wealth fund to be spent on projects inside Southeast Asia’s biggest economy, the UAE state news agency WAM reported recently.

The Indonesia Investment Authority (INA) launched in February.

The INA had reportedly also received multi-billion-dollar commitments prior to its launch, from global companies and agencies, such as the United States International Development Finance Corporation and the Japan Bank for International Cooperation, and some foreign pension funds.

Jakarta will seed the fund with over $6bn in cash and other assets. 

The INA seeks foreign funds as co-investors to finance the country’s economic development and aid coronavirus pandemic recovery.

The UAE investment will be used for infrastructure projects, including roads and ports, and also tourism, agriculture, and other “strategic sectors”, WAM reported.

Indonesian officials have said the INA will give opportunities for foreign investors with different types of risk profiles, while also helping state companies whose balance sheets have been under strain due to large investments in infrastructure 

The INA has been reviewing investment opportunities at dozens of toll road concessions worth $2.6bn, among other projects.

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Global SWFs at a glance 

Over the last couple of decades, the size and number of SWFs have grown drastically. According to the SWF Institute, a global corporation, there were more than 90 SWFs with combined assets amounting to nearly $8.2 trillion dollars in 2020.

End 2020 statsThe INA

Per mid-February 2021, Indonesia created its own SWF.

The Indonesian government set aside $1.1 billion taken from the 2020 state budget and will be followed by another injection of $5.4 bn in 2021.  

Until the end of 2020, the Indonesian government said it collected investment commitments from various countries, ranging from the UAE to the US, amounting to $30.8 bn.

INA CEO Ridha Wirakusumah said toll road projects are the first investment priority for INA because they carry a multiplier effect.

Indonesia’s Ministry of Public Works and Housing targets to build 2,500 km of new toll roads in the 2019–2024 period. If achieved, it would mean there will be around 4,500 km of toll roads that can be used by Indonesian residents. Up to the end of 2020, Indonesia’s toll road network only consisted of 2,346 km.

Fitch Ratings
 The launch of INA is unlikely to result in a near-term reduction in the level of leverage among Indonesian state-owned enterprises (SOEs), says Fitch Ratings.

The government established the INA with the goal of increasing infrastructure investment. 

Its authorized capital consists of an initial cash injection of IDR15 trillion ($1.04 bn) and there are plans to add a further IDR60 trillion of assets by the end of 2021 in the form of cash, state assets, government receivables, and shares of SOE or limited companies. 

The INA may invest in both private sector- and SOE-led projects, and has the authority to both lend and borrow, according to Fitch Ratings. 

“There is little clarity at this stage about the channels through which INA funds will be invested. It is possible that the INA could alleviate the high levels of leverage among Indonesian SOEs engaged in infrastructure that have constrained their capacity to increase investment. It could, for example, acquire their existing project assets, or reduce the pressure on SOEs to raise debt to support their equity contributions in new projects by contributing capital,” the rating agency said. 

“We think the likelihood that the INA will drive a significant deleveraging among Indonesia’s SOEs in aggregate is low in the near term. The INA’s capital is modest relative to the scale of debt among the SOEs engaged in strategic sectors, such as construction, toll roads, and oil and gas. For example, the total debt of Indonesian state-owned construction companies was over IDR170 trillion as of end-September 2020 while state oil and mining company PT Pertamina (Persero) was about IDR300 trillion as of end-June 2020.” 

Accelerating Indonesia’s infrastructure development may require additional capital beyond INA’s planned base, which is small relative to the government’s infrastructure budget for 2021 of IDR417 trillion, or Pertamina’s planned investment of more than $90 billion (around IDR1,300 trillion) over the next six years.