Banking turmoil from Indonesian SWF flagged

An ‘institutional firewall’ should shield basic banking functions from the fund.

Indonesia’s new sovereign wealth fund (SWF), whose launch in February was followed by market turbulence, could give rise to systemic risk in the banking system if concerns about transparency and political interference are ignored, analysts said.

“Systemic risk arises when liquidity and public trust are disrupted, especially if there is a perception that public funds are used for nonbanking agendas,” Andry Satrio Nugroho, head of the Center for Industry, Investment and Trade at the Institute for Development of Economics and Finance, told Asian Banking & Finance.

Danantara, modelled after successful SWFs like Singapore’s Temasek and Malaysia’s Khazanah, seeks to optimise the management of state-owned assets including banks, and drive economic growth.

At the fund’s debut, the benchmark Jakarta Composite Index plunged as much as 7%, whilst the rupiah plummeted to its lowest since the 1998 Asian financial crisis, weighed by unease over Indonesian President Prabowo Subianto’s economic agenda and the country’s recent political turmoil.

Danantara plans to take over the management of seven state companies, including three banks — Bank Negara Indonesia, Bank Rakyat Indonesia, and Bank Mandiri, Indonesia’s biggest bank.

Nugroho cited the need for a robust “institutional firewall” to ensure the separation of Danantara’s strategic role from state banks’ intermediary functions. Third-party funds should strictly be managed by the banks and not pooled into Danantara’s capital, he added.

He also flagged the danger of innovation stagnation at state-owned banks due to bureaucratic red tape. “If all innovations must be approved by a holding company that may not understand digital banking, banks will lose their agility.”

Nugroho also warned against hidden fiscal risks that could arise if Danantara’s funding sources are tied to limited state budgets.

Wahyu Jatmiko, an assistant professor of banking and finance at the University of Southampton, said the stakes are extremely high, with assets under management projected to reach $900b from an initial $20b.

He said Danantara’s success relies on legitimacy, investment strategy, and governance.

He noted that Norway’s Government Pension Fund and Singapore’s Temasek achieved success through strong stakeholder consensus, sustainable investment strategies, and stringent governance standards.

He said the fund’s ability to gain public trust depends on its independence and transparency. “Lack of transparency can lead to moral hazards and corruption, as seen in the 1MDB scandal in Malaysia,” he pointed out.

Jatmiko also cited the need for political and social consensus. Successful SWFs also tend to focus on long-term investments in tech and healthcare, whilst avoiding environmentally harmful projects.

Low-risk investments

BNI expects the move to boost the economy and optimize state-owned assets.

Danantara opens opportunities for state-owned banks to focus on expansion and operational efficiency, while Danantara itself operates as a professional asset manager without burdening the state budget,” Okki Rushartomo, corporate secretary at BNI, said in an emailed reply to questions.

“As part of the national financial ecosystem, we see Danantara as a major strategy for Indonesia in building a stronger and more competitive economic system,” he added.

Donny Oskaria, chief operating officer at Danantara, said governance is a top priority, with personnel hiring based on competence and professionalism, among other things.

“We work directly with state-owned enterprises and see great potential in reducing fraud risks,” he told reporters during a roundtable event in Jakarta in February.

Danantara Chief Investment Officer Pandu Patria Sjahrir said they would initially focus on low-risk investments to ensure stability.

“For now, we will avoid high-risk investments with high returns,” he said at the same event. “Our main focus is governance.”

The sovereign wealth fund is also subject to oversight, including audits by the Audit Board of Indonesia to mitigate risks and prevent abuse of authority, he pointed out.

Despite these assurances, Nugroho suggests further refinements to Danantara’s functions, including limiting major decisions at general stockholders’ meetings. It should also be barred from interfering in banks’ daily operations, he added.

He also proposed a special governance unit within Danantara that will oversee the financial sector and create a reporting system based on service level agreements rather than direct orders.

“Banking is the heart of the national financial system,” Nugroho said. “If we make the wrong move, the impact could be systemic.”