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Indonesia leans on SOEs

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By Rashmi Kumar
18 Dec 2020

State-owned enterprises have emerged as a critical agent for Indonesia’s government to spur economic growth during the pandemic. Their importance is only likely to rise in the future, writes Rashmi Kumar.

Few economists will forget the turmoil of 2020, as much as they might like to. The coronavirus has led to economic contraction in countries across the world. Indonesia is now exception. The country’s GDP stood at negative 5.3% in the second quarter of 2020, marking its first economic contraction in more than 20 years.

Naturally, the government has taken a host of measures to ramp up growth. It has unleashed a combination of fiscal and monetary measures to offer immediate support to the economy, while also thinking of longer term opportunities through a new Omnibus Law and signing a landmark free trade agreement with Asia Pacific countries.

It has also rallied a crucial part of its economy to help support its citizens and drive growth: its state-owned enterprises (SOEs) and state-owned banks.

In June, Indonesia’s finance minister Sri Mulyani Indrawati said the government will shift Rph30tr ($2.9bn) from its account with the central bank to four state-owned banks, Bank Rakyat Indonesia (BRI), Bank Mandiri, Bank Negara Indonesia (BNI) and Bank Tabungan Negara (BTN).

These banks could lend the money at an interest rate equal to 80% of the central bank’s benchmark rate. The four banks were urged to focus on the real estate sector and small and medium sized enterprises, by lending to them at subsidised costs.

“Many governments have been focussed on how to accelerate their economic recovery post Covid.” says Sean Henderson, co-head of debt capital markets, Asia Pacific, at HSBC. “Indonesia is no different as the government launched the National Economic Recovery Programs, which focus on public health, social protection and sectoral and regional government, as well as offering strong support for the sustainability of small enterprises, business incentives and corporate financing.”

The government also launched a loan guarantee facility, using the Indonesia Eximbank as the agent for the programme. The scheme works such that Indo Exim covers up to 80% of a commercial bank’s exposure on a loan to a corporation.

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Tim Uy
Moody's
The central bank offered a one-year postponement of credit or leasing payments for loans of up to Rph10bn for micro, small and medium enterprises (MSMEs) and informal workers, and a similar postponement for SMEs and non-SMEs but without a ceiling and on the basis of agreements with their bank lenders. This scheme is open until March 31, 2021.

“These are just a few examples of how the government has helped corporates during this pandemic,” adds Henderson.

Indonesia used a similar initiative for its SOEs. It budgeted Rph53.57tr in stimulus for SOEs and corporations, although by the end of October, only two SOEs had received the funding. Permodalan Nasional Madani, a financial institution focused on MSMEs, received Rph1tr and Hutama Karya, a toll road operator, got Rph3.5tr.

The ministry of finance said in November that nine SOEs will get state equity support of Rph42.385tr in 2021, some of which will indirectly help give a fillip to the economy. Among the beneficiaries are PLN, which will use the money to distribute electricity to rural parts of the country. Hutama Karya will continue the construction of three toll roads, which could lead to a pick-up in employment numbers in the country and fuel domestic consumption. Sarana Multigriya Finansial, meanwhile, will support long term low-cost funding to mortgage lenders.

There are some, however, who are sceptical over excess reliance on SOEs to drive economic growth.

Tim Uy, an economist at Moody’s, says one of the main ways to reform the economy should be through privatisation of SOEs rather than giving them more power.

Sung Eun Jung, an economist at Oxford Economics in Singapore, adds that the use of SOEs creates some uncertainty among international investors about an open and transparent process for tenders of state projects, and could add to contingent liabilities of the government.

But she adds the situation is not worrying just yet. She says the overall government debt to GDP is still well below the 60% ceiling. While non-financial public debt has risen rapidly in recent years, “the risk of government debt spiraling out of control is a tail risk”.

HSBC’s Henderson says that the SOEs have worked closely with the government in terms of helping to support and facilitate their various subsidy schemes.

“The role of the state-owned banks has been crucial as well, because they are significant lenders to the broader economy and private sector, so both are critical to delivering a strong recovery.”

By Rashmi Kumar
18 Dec 2020