Quick Take: Indonesia’s Sovereign Halo Part 1

[Note: My Quick Takes are my personal commentaries and do not represent IWIRC Indonesia. I have moved in February 2025 to Acrostics Asia.]

By Eveline Danubrata

Indonesia has overhauled a law governing state-owned enterprises (SOEs), giving birth to Danantara—a new investment fund inspired by Singapore’s Temasek—along with questions on how SOEs will operate from now on.

I’ve written since November 2024 about the reason for Danantara’s existence, the gameplan for the fund, and why its architects had to amend the existing SOE law to lay its legal foundation. I also flagged last month that the establishment of Danantara was picking up pace after a delay. (Please click here for my Quick Takes Library).

So when the Indonesian parliament passed the law on Tuesday (4 February 2025), I wasn’t surprised and I went on doing my own thing. But over the weekend, one of my friends sent me an article that reported a key point: Clause 4B in the latest SOE law states that “profits or losses incurred by SOEs are the profits or losses of the SOEs.”

“The capital and wealth (modal dan kekayaan) of SOEs belong to the SOEs and all the profits or losses incurred by the SOEs are not the profits or losses of the state,” the clause said. An editor at local newspaper Kontan wrote, citing a legal practitioner, that the revision to the SOE law seems to encourage officials to be “bolder in making decisions and not be intimidated by the prospect of state losses.”

Why is this significant?

All along, SOE officials have been operating in fear of being accused by the state auditor of realizing state losses, which may even lead to criminal prosecution. As I wrote last year, state-owned bankers preferred rolling over defaulted loans rather than taking principal haircuts, especially if they inherited legacy credit from their predecessors.

So the decoupling of SOE and state losses would be positive if these state-owned banks can now write off the zombie loans in their books and deploy the capital to better borrowers or more productive sectors. However, the flip side is it raises questions among investors and lenders on who will be responsible for SOE losses.

First of all, there seems to be a misperception that the government provides a blanket backstop to all SOEs. The reality is all SOEs are equal, but some are more equal than others. The first offshore bond with a direct guarantee from the government was issued in 2020 by Hutama Karya, which is building the Trans-Sumatra toll road – a key project in former President Joko Widodo’s infrastructure drive.

Many investors believe that energy company Pertamina and power distributor Perusahaan Listrik Negara (PLN) are strategic SOEs and the government will never let them default. Even though some of their debt may not carry any government guarantee in black and white, these SOEs have been able to raise billions of dollars from the market because of what a second friend calls the “sovereign halo”.

With the creation of Danantara, rating agencies will also have to decide how to assess this entity if it issues debt at the holding company level. As I pointed out in December 2024, the typical option of pegging certain SOEs below the sovereign rating may not work if Danantara’s debt is classified outside the government’s balance sheet.

Now that the SOE law has been passed, lawyers and analysts will likely get calls on the potential implications.

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