While both the US and Indonesia announced plans to establish new sovereign wealth funds (SWFs) just days apart, bigger challenges lie ahead for the Southeast Asian archipelago nation, noted a former regulator.
Bhaskar Dasgupta, previously attached to the Financial Services Regulatory Authority of Abu Dhabi Global Market, said the huge amounts that SWFs are able to deploy can badly skew illiquid or smaller market environments.
To avoid such a problem within the archipelago’s capital markets, Bhaskar, who is Apex Group Board Chairman (Middle East and India), suggested that the just-announced Danantara Indonesia – with assets under management to be exceeding US$900 billion by 2029 – should be mandated to invest abroad where possible for optimal returns.
This Indonesian SWF will be launched on the 24th February 2025 by Indonesia’s President Prabowo Subianto – to take over all state firm-holdings from the Ministry of State-Owned Enterprises. These include Bank Mandiri, Bank Rakyat Indonesia and Bank Negara Indonesia.
From an earnings perspective, Bhaskar thinks that Danantara Indonesia should adopt the outward-looking models of the Abu Dhabi Investment Authority “which has been explicitly mandated not to invest in the UAE”. A similar stance is adopted by Norway’s Government Pension Fund Global.
“If the SWF’s resources are sufficiently and properly deployed, the entity can take excess reserves of the country and invest these in different opportunities. As this would normally not be done by existing government reserves policies, the SWF enables further diversification.”
Bkaskar also cited the Emirates Investment Authority, which also obtains cash inflow from the issuance of fixed income instruments like Sukuk. “This fund can then obtain necessary resources to invest in infrastructure or whatever is needed with a clear mandate for national economic growth.”
The Indonesia president reportedly said the new SWF will invest in sustainable high impact projects across sectors such as renewable energy, advanced manufacturing, downstream industries and food production.
It is not confirmed whether the Indonesian SWF – poised to be one of the largest in the world – will have a Shariah mandate or portfolio, although Indonesia is well positioned to do so to align with its international Islamic financial hub ambition and leverage its Muslim population strength. There is not a fully Shariah compliant SWF (except potentially Iran’s) but several have adopted a hybrid model such as Malaysia’s Khazanah Nasional.
Bhaskar further advised against imposing too many constraints on Danantara Indonesia as the SWF is meant to build the wealth of the nation.
“Maybe what can be done is for investment allocation in public equities to be capped at 50%, maximum of 30% in infrastructure and 20% going to Shariah-based assets. Use of the proceeds can be Shariah compliant, but investments strategy should be left open so that the maximum revenue and returns can be generated for a given amount of risk.”
Another key aspect would be the costs involved – where typically 1% is spent on running expenses, 1% on cash calls and 1% on reinvesting into the fund itself to foster continued growth. “The hurdle rate would in effect be 3%. This increases if the fund mandate is more ambitious, with the hurdle rate of potentially 5-6%. Also note that Shariah compliance does include costs.”
Bhaskar also warned against any SWF being politically-controlled – as that can lead to public money being channeled into projects without economic interest or not being professionally managed. “For every SWF, the focus has to always be on what the return will be to the nation.”
Among the suggestions made by US President Donald Trump with his executive order on the 3rd February 2025 is for the American SWF to purchase TikTok – the popular video-sharing app operated by China firm ByteDance – as its foreign ownership could cause this app to be banned in the US.
