Quick Take: Indonesia’s Sovereign Halo Part 2

[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’s revised law for state-owned enterprises (SOEs) has generated a lot of discussion, with some calling it a potential game-changer.

Apart from laying the foundation for Danantara, the so-called Indonesian Temasek, the amended law also decoupled SOE and state losses. While this could remove the Sword of Damocles that’s been hanging over state-owned banks, there might also be unintended consequences for key SOEs like power distributor Perusahaan Listrik Negara (PLN) and energy company Pertamina.

I’ve collected the feedback from friends and commenters so far into two buckets.

?? State-owned banks

If state-owned banks can recognize losses without the threat of a criminal prosecution for the officials involved, this could hopefully encourage them to fix the problem instead of sweeping it under the rug.

To use the analogy of a banker who stuffed bad loans into a suitcase that grew bigger and bigger, the hard work going forward is to open that suitcase and sort through the baggage.

I wrote last year that based on South Korea’s post-Asian Financial Crisis experience, transparency around asset quality and pricing is key to creating a secondary market where bad loans can be traded on a commercial basis. One of the commenters also pointed out that Thailand is an example of how a market for non-performing loans can develop.

In Indonesia, the first step to clean up the system is to catalogue the SOE losses and then transfer the distressed assets or loans to state-owned asset manager Perusahaan Pengelola Aset (PPA), a second commenter said, noting that independent appraisal and valuation would be needed to attract bids from private financiers and investors.

Even if PPA was designed to be the cleaning house for distressed SOE assets, it would likely be overloaded by the sheer volume, so the private market should also be allowed to function. (Please click here for my Quick Takes Library).

However, a veteran banker friend cautioned that the market mechanism would simply be an “illusion” if there’s only a shallow pool of bidders and the auction ends up being engineered among a group of friends. In short, there must be enough real bids for the SOE assets.

? PLN and Pertamina

Indonesia has a parallel with China, where investors have been trying to read the tea leaves on which SOEs or local government financing vehicles (LGFVs) are supposedly closest to the sun. The true test of whether the firefighters will come or not is for an actual fire to break out, but nobody wants that to happen.

While the Indonesian government is required to cover the operational shortfall incurred by PLN and Pertamina to fulfill their public service obligations, this is not the same as guaranteeing their financial debt.

I wrote last week that many bankers and bondholders have lent to PLN and Pertamina on the belief that they are strategic SOEs whose debt is implicitly backed by the state. In short, these creditors are betting that both SOEs are too big to fail and the Indonesian government will step in to prevent any default.

Without government subsidies and compensations, PLN would have made a loss of IDR 120 trillion (USD 7.3 billion) for its 2023 fiscal year, according to an analysis by the Institute for Energy Economics and Financial Analysis (IEEFA). There’s always been a push-and-pull between commercial and public service goals, but this tension could be even more pronounced if PLN ends up being consolidated into Danantara.

A buyside friend said there are concerns about how Indonesia’s regulatory changes will affect SOE leverage and governance, but there is “not much clarity at the moment.” PLN will likely have to field questions from bondholders on the strength of its state backing, as it is reportedly preparing to sell as much as USD 1.5 billion of notes.

While the latest SOE law may help state-owned banks to unclog their bad loans, PLN and Pertamina may also face more scrutiny from investors. It remains to be seen what the net effect will be.