Indonesian sovereign wealth fund entry into capital market raises long-term risks

The Star

25-04-2025

JAKARTA: Danantara's planned entry into the domestic capital market is expected to significantly help stabilise the local stocks and bonds market, especially at times of volatility, but some have also warned that the move could disrupt the sovereign wealth fund's (SWF) focus on its much needed long-term projects for the economy.
The move comes after the country's stock market and currency emerged as one of Asia's worst-performing this year amid uncertainties due to the United States' wide-sweeping tariffs and concerns over the country's fiscal policy.
The IDX composite, the country's benchmark, fell to its lowest level of the year at 5,968 points on April 9, the second trading day after the announcement, marking a 15.9 per cent drop from its position at the start of 2025. Meanwhile, the rupiah momentarily hit around Rp 17,000 per US dollar on April 7, as it extended depreciation against the greenback since the beginning of the year.
Danantara's chief investment officer Pandu Sjahrir said on April 14 that the fund was ready to act as a 'liquidity provider' for the domestic capital market. He noted that dividends from state-owned enterprises (SOEs), a key source of the fund's capital, are expected to start flowing later this April.
He vowed to be careful in the placement of funds, saying 'what's important is the return', while ensuring the fund would start weighing investment in real strategic projects.
Fikri C. Permana, an economist at local brokerage KB Valbury Sekuritas, said Danantara's intervention could serve as a positive sentiment for the IDX. He likened the fund's potential role to that of the Workers Social Security Agency (BPJS Ketenagakerjaan), which had limited activity in the stock market due to underwhelming returns from its existing investments.
He also said Danantara should consider extending its role as a long-term institutional investor in the market, citing attractive return prospects in the future. 'Government-backed institutions in other countries have taken similar steps, even Japan's central bank invests in equities,' he told The Jakarta Post on Tuesday (April 22).
On April 7, China intervened to support domestic stocks plunging on US tariff woes, with a sovereign wealth fund increasing its holdings in equities and saying it would defend market stability, Reuters reported.
To manage risk, he recommended that Danantara diversify beyond its current holdings in SOEs' shares and consider investing in privately owned, publicly listed companies. 'They could look into sectors aligned with government programs, such as the free nutritious meal program, where profits from these firms would eventually flow back to Danantara in the form of dividends,' he added.
Felix Darmawan, an economist at Panin Sekuritas, agreed that Danantara's active presence in the capital market could help stabilise share prices of publicly listed SOEs amid a bearish trend fueled by sustained foreign capital outflows.
He noted that the fund's support should not be limited to banking stocks, which have an outsized influence on the IDX Composite, but should also extend to commodities such as gold and coal, as well as the construction sector.
'[Still,] if Danantara wants to maintain investor confidence, especially from foreign investors, it must also push for greater transparency, stronger governance and better management within SOEs, not just intervene in the market,' Felix told Kontan on Tuesday.
Both the IDX and the Financial Services Authority have welcomed Danantara's entry into the market, calling it a timely move to reinforce investor confidence and market resilience.
Following the announcement of Danantara's plan, the IDX Composite continued its upward momentum, climbing 6.6 per cent to close at 6,634.4 on Wednesday, despite no official confirmation that the fund had already begun intervening in the market.
Frederic Neumann, chief Asia economist at HSBC, acknowledged that short-term market interventions by government agencies can provide temporary relief for equity markets. However, he expressed skepticism about their long-term effectiveness.
'As an economist, I'd say that no matter the resources at your disposal, channeling them into strengthening growth fundamentals tends to yield better long-term outcomes,' Neumann told the Post on Tuesday.
'Indonesia has tremendous growth potential, and as long as the fundamentals are sound, the market should be able to correct itself.' In response to external pressures, such as US' blanket tariffs, Neumann urged the government to use its fiscal resources on investments that support sustainable economic growth as well as introducing deregulation and pro-business policies.
Rully Wisnubroto, senior economist at Mirae Asset Sekuritas Indonesia, acknowledged that market intervention could be 'understandable' in the short term to stabilise prices and ease investor anxiety. However, he cautioned that such measures should not become a long-term strategy. He also flagged potential risks for Danantara to enter the market during a period of heightened volatility.
"Frankly, I don't agree with using SOE dividends [collected by Danantara] to support market liquidity," Rully said during a press conference on April 17. "Those funds were meant to drive economic growth [through productive investments], as originally promised." - The Jakarta Post/ANN