THE MISSING PERSPECTIVE

Source: Ashmore
Episode #8 – SWF (part 2)
By #theGeek

How time flies. It had been slightly more than a year

since the launching of The Missing Perspective. To
celebrate our anniversary, #theGeek decided to
reminisce about the past and revisit our very first
premiere episode titled SWF and re-attempt to
convince you why SWF is a real game changer.

Recap from our premiere (#1). Back then, #theGeek

decided to take up the challenge and tackled a
complicated issue on hand; How Indonesia could
Source: Ashmore
grow beyond 5% GDP with SWF? We argued that
SWF provides a mean to bypass the 3% budget What’s the newest update? After months of
deficit cap rule in order to fund more infrastructure anxiously waiting (and mentally hoping that we
projects and push for higher growth. Equipped with aren’t wrong on the first episode), Indonesia’s SWF
very little information then, we reckoned SWF size was finally created through the passing of Omnibus
may reach up to USD30bn and based on IMF study Law in Oct20. Named as Indonesia Investment
on fiscal multipliers, we expect an additional 0.24%- Authority, it will receive an initial capital injection of
1.44% of GDP/year from SWF. We thought that USD5bn from the government where USD1bn will
might had been an aggressive set of assumptions, come in the form of cash from 2020 APBN and the
but we are yet again proven to be too conservative. remaining USD4bn from either state’s assets, shares
or receivables. What is interesting, and positively
Just a short refresher course on SWF structure
surprising development, is that even before the
before we move on to the exciting part. INA
initial USD5bn capital had been transferred to the
(Indonesia Investment Authority) is designed to be
fund, the government had announced yet another
very flexible in order to cater to different investors
USD1bn of cash injection into the SWF using 2021
wants and needs. Think of it like a restaurant menu:
APBN, bringing the total initial capital to USD6bn.
you can choose between a degustation set (master
or sub funds), ala carte (per project basis), On top of that, INA can also borrow through banks
recommended chef specials (brownfield projects) or or bond issuance to enlarge its capital. Assuming a
even new dishes (greenfield projects)! If investors, 3x D/E ratio, SWF “initial” size could easily reach
for example, wants to invest specifically in a hydro USD18bn. And our channel checks also indicate that
power plant in Sulawesi, it can do so on per project there are five foreign investors interested to
basis. Or if the investors prefer to spread their risks participate in the SWF, which could add another
and have a more diversified toll roads/ports/airports USD9.8bn into the fund. These investors include
investments, they can do so on Sub Funds basis (eg. International Development Finance Company (IDFC,
Fund 1 = toll roads only; Fund 2 = airports only). US – USD2bn), Japan Bank for International
Cooperation (JBIC, JP – USD4bn), Caisse de depot et
placement du Quebec (CDPQ, Canada – USD2bn),
Arberdeen Providing Group (APG, Netherlands –
USD1.5bn) and Macquarie Group (AU – USD300mn).

1
THE MISSING PERSPECTIVE
investment commitments this year. Afterall,
SWF potential fund size by the end of
investors would prefer to see how SWF fares with
2021: USD30.8bn or Rp440tr
other EM funds. Showing a full transparency,
30.8 governance, independence, proper regulations and
1.5 0.3
2 incorporating all the best practices for the SWF is a
4
2 must and a priority. Only once those are proven,
14 then would investors flock into the fund as they
chase for higher yield investments.
4
1 1
How high are the yields in comparison then? The
minimum equity IRR requirement to be qualified for
INA is a very generous 13% for its pilot fund,
implying an equity premium of 6-7% or so. This is
more than measure up to other countries’ SWF
Source: Nomura Research, CIMB Research, Ashmore yields that only offer around 1-7% or equity
premium of -2% to +5%. This is one of the reasons
So, how big is USD30.8bn really? A USD30.8bn why we believe that as long as SWF is executed
starter fund is equivalent to Rp430tr which is 2.7% of properly, investors would act rationally (anyone
Indo GDP; 53%/11% higher than our 2020/21 infra remember their University subject on modern
budget; 7-8x of India SWF size of around USD4bn portfolio theory?) and invest in it.
(National Investment and Infrastructure Fund); 655x
of Tuvalu’s GDP or similar to Nepal’s GDP. Okay, fine,
using the smallest country GDP in the world, Tuvalu, Indonesia INA provides one of the
as a comparison is extreme and unfair, but you get highest SWF yield vs. other countries
the gist. It is a sizeable fund to boast. Oh, did I
JP JBIC 1%
mention that the government is actually aiming for QAT QIA 2%
USD100bn size fund in the longer term? SG GIC 3%
MY Khazanah 3%
HK HKEF 5%
SG Temasek 5%
Norway Norges 6%
UAE ADIA 7%
CH CIC 7%
SA PIF 7%
ID INA 13%
0% 5% 10% 15%

Source: Nomura Research, Ashmore

And INA also offer one of the highest

equity risk premium vs. other countries

-2% QAT QIA

MY Khazanah 0%
JP JBIC 1%
SG GIC 2%
CH CIC 4%
Source: Google images, Ashmore SG Temasek 4%
HK HKEF 4%
Given that the 1MDB scandal is still fresh in Norway Norges 5%
SA PIF 5%
investors’ mind, it is only natural that one would
ID INA 7%
question the sanity of our enthusiasm on INA. Why
would foreign investors put their money in INA? -4% -2% 0% 2% 4% 6% 8%
Truth to be told, we are cautiously optimistic that
there would be more investors pledging their Source: Nomura Research, Ashmore

2
THE MISSING PERSPECTIVE
And why is INA a game changer to Indo? Flashback How INA solve the financing issue
to Episode #1, we wrote that Indonesia is a hostage
to external macro environment due to its deficit
nature and the 3% budget deficit cap rule placed GDP = G + C + I + (X-M)
upon by the House of Representatives (DPR). This
Infra spending can now comes from 2 engines: fiscal
had capped our ability to grow faster than the 4-6% stimulus "G" and INA investments which is the "I"
growth rate as we simply do not have the money
internally to finance our own growth and are always
in need of external financing (which should improve
once EV and the refineries starts production and
exports to the rest of the world – but more on this
next time). INA solve this structural problem. It As explained before, higher "G" can be problemtic
due to debt limitations. Higher "I" however, is very
allows Indonesia to continually raise both equity and much welcome. It does not drag government
debt from investors without putting a pressure balance sheet and there is no "cap" to the amount
Indo’s government balance sheet. as long as there is a continual yield producing
projects to invest in.
Indo lagged behind its peers in infra
spending due to financing limitations.
31%

14% 13% Thus, government can now use its resources more
5% 3% 3% 2% efficiently. Using the Covid19 example before,
government can now support "C" without the need
to reduce infra spending significantly as we can now
source financing from INA by launching sub funds
and seek subscriptions or issue debt within INA.

Capex as % of nominal GDP (2018) Conclusion. With INA, Indonesia should be able to
have a more stable growth going forward as infra
Source: Credit Suisse Research, Ashmore
spending is usually shaped by the government and
How this helps Indonesia growth? Let’s compare they can utilize that optionality as and when it is
the current financing constraint vs. the endless needed. Stability is valued by investors and with
financing possibility from INA. that, both Indo equity and bond markets should be
in better position to defend against crisis. Note how
Current financing problem for infra spending China is less affected by GFC in 2009 and Fed
tantrum in 2013-16? Well, that is all thanks to the
higher infra spending contribution.
GDP = G + C + I + (X-M)
Infra spending is part of fiscal stimulus which is the "G"
in the formula. Note that Indo GDP is very much driven Infra contribution pick up when global
by "C" which usually comprises of >50% of GDP. growth slows down
60%
50%
40%
Higher “G” = more government bond issuance = 30%
pressure on the balance sheet and bondholders do not 20%
like overly leverage countries = more pressure on
10%
Rupiah. And don’t forget, there is the 3% cap level =
there is a limit to the bond issuance 0%
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018

-10%

CH infra contribution Global growth

Hence, government has to allocate its resources to more
important uses; choosing between social assistance to
support "C" or infra spending "G". Eg. during 2020 Source: Morgan Stanley Research, CEIC, Ashmore
Covid19 situation, infra budget was cut by Rp142tr (-
33%) to Rp281tr in order to make room for PEN.

3
THE MISSING PERSPECTIVE
Risk factors: Emerging Markets carry risks as well as rewards. The Fund may be more volatile than more mature
markets, and the value of an investment in the Fund could move sharply down or up. In extreme circumstances, this
could result in a total loss of the investment. Emerging Markets are volatile and may suffer from liquidity problems;
changes in rates of exchange between currencies may cause the value of investments to decrease or increase; the
operational risks of investing are higher than in more developed markets. For a full description of these and further
risks, investors should refer to the Fund’s latest Prospectus or (if applicable) other offering document relating to the
Fund. Important information: This document is issued by PT AAMI which is authorised and regulated by the
Indonesia Financial Services Authority / Otoritas Jasa Keuangan (OJK). The information and any opinions contained
in this document have been compiled in good faith, but no representation or warranty, express or implied, is made
as to their accuracy, completeness or correctness. Save to the extent (if any) that exclusion of liability is prohibited
by any applicable law or regulation, PT AAMI, its officers, employees, representatives and agents expressly advise
that they shall not be liable in any respect whatsoever for any loss or damage, whether direct, indirect,
consequential or otherwise however arising (whether in negligence or otherwise) out of or in connection with the
contents of or any omissions from this document. All prospective investors must obtain a copy of the latest
Prospectus or (if applicable) other offering document relating to the Fund prior to making any decision to invest in
the Fund. This document does not constitute and may not be relied upon as constituting any form of investment
advice or inducement to invest and prospective investors are advised to ensure that they obtain appropriate
independent professional advice before making any investment in the Fund. INVESTMENT IN INVESTMENT FUND
CONTAINS RISK. PROSPECTIVE INVESTOR MUST READ AND UNDERSTAND THE PROSPECTUS PRIOR TO INVEST IN
INVESTMENT FUND. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE.