Indonesia’s sovereign wealth fund vows to avoid pitfalls of 1MDB

The head of Indonesia’s new sovereign wealth fund has pledged that the multibillion-dollar facility will avoid the traps that led to the spectacular collapse of neighbouring Malaysia’s 1MDB that started in 2015.

Jakarta’s new fund, known as the Indonesia Investment Authority, is aiming to grow to as much as $100bn, with the United Arab Emirates last week becoming its first external investor with a pledge to invest $10bn with the fund.

The fund represents a high-profile test of Jakarta’s capacity for good governance after south-east Asia’s largest country was ranked 102 out of 180 nations last year in Transparency International’s corruption index. 

“The whole sovereign wealth fund world knows of what not to do because of one example,” Ridha Wirakusumah, the chief executive of the Indonesia Investment Authority, said in an interview, referring to 1MDB.

The authority is the first significant gauge of international appetite for sovereign wealth funds in developing countries in south-east Asia since 1MDB.

The Malaysian fund imploded in an international scandal after officials and their associates misappropriated $4.5bn, according to the US Department of Justice. Former Malaysian prime minister Najib Razak was sentenced to 12 years in jail and faces other trials in Kuala Lumpur in relation to the scam while Goldman Sachs — which arranged 1MDB bonds whose proceeds were largely stolen — has reached a $3.9bn settlement with Malaysia.

To reassure investors, Jakarta has chosen a veteran private sector executive to head the authority in Wirakusumah, a former senior banker with experience at global private equity group KKR and insurance company AIG. He also headed Bank Permata, a former joint venture between Standard Chartered and Astra, the Indonesian industrial group controlled by Hong Kong-based conglomerate Jardine Matheson.

While government officials have regularly named potential investors in the fund, Wirakusumah declined to specify any possible backers, adding that he was open to speaking with anyone ready to co-invest “professionally”.

“I would rather show the world that we can actually do deals . . . with strong governance,” Wirakusumah told the Financial Times shortly after his appointment in February. “I want to be able to create an organisation that can withstand time and politics and business ups and downs.”

He added that if “money comes with . . . conditions”, such as an investor demanding that the Indonesian fund not take money from a rival country, he would refer the matter to politicians.

“I’m going to throw it upstairs and say ‘Guys, you deal with it.’ I’m not a politician,” Wirakusumah said.

Indonesia is being courted by the US and China as a strategic partner in south-east Asia. One mooted large investor in the Indonesian fund is the US International Development Finance Corporation, a federal government agency that Jakarta claims has pledged $2bn.

Critics, however, have argued that a bill passed in 2019 weakening the country’s anti-graft agency has dented Indonesia’s fight against corruption.

Indonesia hopes the fund will help it finance the more than $70bn needed to invest annually in infrastructure, as it tries to revive an economy that shrank 2.1 per cent in 2020 against a year earlier. 

Wellian Wiranto, economist at OCBC, said the fund could also generate longer-term inflows that would reduce “Indonesia’s dependence on footloose portfolio funding flows” known for their volatility.

The UAE, whose pledge is the first formal foreign investment commitment to the fund since its formal establishment, said it would invest in sectors including roads, ports and tourism. This was in addition to $5bn injected by the Indonesian government. Wirakusumah’s initial goal was to attract at least $15bn from international investors.

Alongside other oil-rich Gulf states, the UAE is increasingly turning its gaze to Asia, which buys most of the region’s hydrocarbons exports. 

“Everyone is pivoting east,” said one banker working with regional sovereign wealth funds.

Wirakusumah said the UAE “had played a strong role in the creation” of the fund through the Abu Dhabi Investment Authority. The country last year committed $23bn to Indonesian infrastructure projects.