JAKARTA (TheInsiderStories) - Sheikh Mohamed bin Zayed Al Nahyan, Crown Prince of Abu Dhabi announced the United Arab Emirate (UAE) will invest US$10 billion in Indonesia Investment Authority (INA), EMA reported today (03/23). The investments will focus on infrastructure, roads, ports, tourism, agriculture, and other promising sectors.
Indonesian government has appointed the deputy supreme commander of the UAE Armed Forces lead the steering committee of Indonesia’ planned new capital city. The Prince has two members Japan’ Softbank Group founder, Masayoshi Son, and British former prime minister, Tony Blair under President Joko Widodo’ charge.
The country hope their presence will increase the selling value of the new capital city to investors to meet an estimated cost of Rp466 trillion (US$32.36 billion) for its construction. Earlier, coordinating minister for maritime and investment affairs Luhut Binsar Pandjaitan, had said that UAE government had prepared $22.8 billion to invest in Indonesia through a sovereign wealth fund together with SoftBank and the United States International Development Finance Corporation.
In the latest report, Fitch Rating, said that the launch of INA is unlikely to result in a near-term reduction in the level of leverage among Indonesian state-owned enterprises (SOEs), says Fitch Ratings. The government established the investment fund company with a goal of increasing the infrastructure investment.
Its authorized capital consists of an initial cash injection and there are plans to add a further Rp60 trillion of assets by the end of 2021, in the form of cash, state assets, government receivables and shares of SOEs or limited companies. The INA may invest in both private sector- and SOE-led projects, and has the authority to both lend and borrow.
There is little clarity at this stage about the channels through which INA funds will be invested. Its possible that the new body could alleviate the high levels of leverage among SOEs engaged in infrastructure that have constrained their capacity to increase investment. It could, for example, acquire their existing project assets, or reduce the pressure on SOEs to raise debt to support their equity contributions in new projects by contributing capital.
“We think the likelihood that the INA will drive a significant deleveraging among Indonesia’s SOEs in aggregate is low in the near term. The INA’ capital is modest relative to the scale of debt among the SOEs engaged in strategic sectors, such as construction, toll roads and oil and gas,” said Fitch.
For example, the total debt of Indonesian state-owned construction companies was over Rp170 trillion as of end-September 2020 and the energy holding, PT Pertamina was about Rp300 trillion as of end-June 2020. Its possible that the INA’ engagement in specific projects could reduce leverage at certain SOEs, but this would also depend on the strategic decisions of the companies involved.
Fitch also said, there is a risk that any capital relief provided by the SWF company could be eroded if SOEs channel the released funds back into new infrastructure projects. This risk is significant, given the government’ desire to accelerate such investments.
Accelerating Indonesia’ infrastructure development may require additional capital beyond INA’ planned base, which is small relative to the infrastructure budget for 2021 of Rp417 trillion, or Pertamina’ planned investment of more than $90 billion over the next six years.
“We expect infrastructure projects such as toll roads, rather than oil and gas, to be INA’ first priority due to their multiplier effect on economic growth,” wrote Fitch.
The INA’ capacity to mobilise funds may be amplified if it is able to channel overseas capital into Indonesian infrastructure investments. A number of foreign funds and state-backed development agencies, such as the US International Development Finance Corporation, have shown interest in investment partnerships with the state firm.
It is possible that the authority’ privileged legal and political positions may provide greater assurance to foreign partners wanting to invest in infrastructure. Article 72 of the regulations establishing the INA stipulates that it may not be declared in default unless it is proved insolvent based on an insolvency test performed by an independent agency appointed by the ministry of finance.
This will render the INA less vulnerable to insolvency claims from rogue creditors, who might otherwise submit bankruptcy petitions based on negligible claims and on an unsubstantiated basis.
Nonetheless, the body has not yet secured any external capital contributions and we view such mobilization as being more likely over the longer term, as it develops a record of funding and managing projects. Addressing prevailing policy-related and project-specific issues in Indonesia that have hampered investors’ appetite could also assist the INA to attract long-term investment.
US$1: Rp14,400
Written by Editorial Staff, Email: theinsiderstories@gmail.com
