Indonesia recently passed legislation paving the way for the creation of a new state-owned investment fund called Danantara. This follows the creation of another state-owned investment fund, the Indonesia Investment Authority, or INA, during the Jokowi administration. The INA has been in operation for several years, mobilizing investment in various priority sectors like logistics and toll roads.
Not to be outdone, the Philippines created its own state-owned investment vehicle, the Maharlika Wealth Fund. After a few years of figuring out key details, such as how it would be structured and funded, Maharlika is now operational and preparing to make its first investment later this year.
State-owned investment funds are not new in Southeast Asia. Singapore’s Temasek has been around since the 1970s and manages a portfolio worth hundreds of billions of dollars. State-owned investment funds have also been a staple of Malaysia’s economy for many decades, and are being primed to play a more active role in driving investment in the years ahead.
What’s interesting about the proliferation of new funds is that they are being created in countries where we would not typically expect to see them, like Indonesia and the Philippines. In recent years, these countries have generally run deficits in their current accounts meaning they import more goods and services than they sell to the rest of the world, and receive more capital inflows as well. (The COVID-19 pandemic shifted this pattern a little thanks to booming commodity exports, but it looks like Indonesia’s current account shifted back to deficit in 2024).
Malaysia and Singapore, on the other hand, have historically been surplus countries. This has allowed them to accumulate large foreign exchange reserves, and sovereign wealth funds like Temasek and Khazanah were created in order to reinvest these assets and manage them in the public interest. This is common with net exporting countries like Norway or the UAE which also have sovereign wealth funds.
Because Indonesia and the Philippines can be thought of as net debtor countries, it is harder for them to accumulate reserves through exports. In the absence of such reserves, the natural question is how will they fund their sovereign wealth funds? What, exactly, is the source of the wealth that these funds will be managing?
Although Indonesia does not have vast foreign exchange reserves, it does have other forms of state-owned assets including ownership of very profitable state-owned banks. What Indonesia did to fund the INA was to seed it with about $1 billion in cash and then transfer shares to two of the most profitable state-owned banks. This actually gives the INA a pretty sound capital structure, despite not being funded in the way a typical sovereign wealth fund would be.
For Danantara, the details remain murky. It seems the state has enacted sharp budget cuts to reallocate billions of dollars in fiscal savings to the new investment fund. It will also take direct control of some of Indonesia’s biggest state-owned companies. To be honest, it is very unclear exactly how all of this will work but it shows that the Indonesian government is doubling down on its desire to leverage state-owned financial resources in order to drive investment in some way.
In the Philippines, the Maharlika Fund is preparing to make its first investment this year, and it traveled a long road to get here. The Philippines not only lacks large foreign exchange reserves, it also has fewer state-owned companies that could be used as a capital base for an investment fund. The Maharlika fund therefore went through several iterations including plans to tap a public pension fund, before settling on a somewhat similar arrangement as the INA wherein a pair of state-owned development banks will help capitalize the fund. The central bank and government will also contribute.
There has been a lot of resistance to this idea, and the basic premise is indeed a little hard to parse given that unlike Indonesia, state-owned banks in the Philippines are not big cashflow machines. The government is already facing steep fiscal deficits, with borrowing in the Philippines as a percentage of GDP projected to be notably higher than Indonesia in 2025. That the government has pushed this plan forward despite these obstacles shows just how far this idea that the state should play an active role in capital markets and investment has penetrated the region.
With most of these new funds only just starting, or still in a nascent phase of development like Danatara, it’s too early to say much about how they operate or whether they are effective. What it definitely tells us, however, is that broadly speaking the state’s role in the economy is shifting in the region. Like it or not states are increasingly inserting themselves into markets throughout Southeast Asia and playing a more assertive role as active participants. We see it in industrial policy and trade and now, with the upsurge in state-owned investment funds, we are seeing it in financial and capital markets.
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