Indonesia's new sovereign wealth fund is not short of ambition. With circa US$900 billion in potential assets, Danantara would surpass Singapore's Temasek and Malaysia's Khazanah in size.

We don't expect the fund's launch to have an immediate effect on Indonesia's fiscal position or the sovereign credit rating (BBB/Stable/A-2).

We also believe the government of Indonesia remains incentivized to continue supporting its most essential state-owned entities (SOEs). Downside credit risk could materialize if mechanisms for monitoring SOE performance and providing support to these companies create timing uncertainties. Public disclosures suggest oversight mechanisms remain a work in progress.

We address investor questions on:

• Danantara's governance, oversight and transparency, and management of investee SOEs;
• The agency's own objectives and financial policies;
• The willingness of the government to provide timely extraordinary support to SOEs in the new structure;
• Operational and financial interactions between Danantara and investee companies.

Frequently Asked Questions

What are Danantara's main objectives?

Danantara (Daya Anagata Nusantara Investment Management Board) is a government agency whose main purpose is to consolidate and manage current and future assets owned by the government of Indonesia.

A February 2025 law sets the agency's minimum corporate capital at one thousand trillion rupiah (approximately US$60 billion). That capital may be increased through state capital participation and or other sources. The agency reports to the Indonesian president.

A crucial step over the coming weeks is the non-cash transfer into the structure of the government's stakes in as much as 65 of its largest SOEs. Those include:

• Oil and gas conglomerate Pertamina (Persero) PT;
• Integrated power utility Perusahaan Perseroan (Persero) PT Perusahaan Listrik Negara (PLN);
• Diversified miner Mineral Industri Indonesia (Persero) PT ("MIND ID");
• Telecommunications company Telekomunikasi Indonesia Tbk PT, and;
• the three largest state-owned banks: Bank Mandiri (Persero) PT; Bank Rakyat Indonesia (Persero) Tbk. PT; and Bank Negara Indonesia (Persero) Tbk. PT.

Stakes in additional SOEs may also be eventually transferred.

What credit aspects of Danantara's governance and oversight mechanisms are you focusing on?

The February 2025 law highlights the contours of Danantara's future governance mechanisms. Additional details on the roles and responsibilities of both bodies will become clearer through subsequent government regulations.

We're likely to focus on:

The roles and responsibilities of the governance bodies.  Appointment and dismissal power resides with the Indonesian president, so the nature and experience of appointees and the balance between political and technical appointees will be of special interest.

The quality on governance mechanisms.  Developing a record of transparency and effective implementation of governance processes may take time.

Interaction between investee companies and their legacy reference ministry and the Ministry of SOEs.  This will involve economic objectives, energy policy, subsidy setting and payment, investments. The sheer number of public and private stakeholders, including the president, the government cabinet, reference ministries and investee companies, could either increase the number of "conflicts of objectives" and hinder coordination or facilitate it.

Table 1

Does the launch of Danantara affect the credit ratings on the sovereign?

The immediate impact on our sovereign credit ratings is limited. Ultimately, the most direct potential channel for any change in Indonesia's sovereign credit profile will be through its fiscal and debt settings.

Could the agency affect the government's fiscal position?

Our base case is that the establishment of Danantara will not affect the government's commitment to maintaining a fiscal deficit below 3% of GDP, which is its long-standing fiscal rule. We note that the government also retains its fiscal deficit target of about 2.5% of GDP for 2025.

We don't foresee a meaningful change in the general government's fiscal balance related to Danantara. We understand the government intends to provide some of the corporate capital to Danantara, though the amount and the timeframe for such transfers could vary. The government may use a combination of budgetary savings on the expenditure side, and dividends from the SOEs, among its means of providing this capital.

How could the accrual of a large share of SOE dividends to Danantara, as a separate entity from the government, affect the Indonesian government's revenue profile?

Total SOE dividends are equivalent to about 0.4% of GDP, meaning that a redirection of all or some of these to Danantara could deduct an equivalent amount from the general government's revenue.

The proportion of these dividends that flows through Danantara and back to the Ministry of Finance would continue to contribute to total general government revenue, but may be lower than the previous aggregate of SOE dividend contribution to the budget. From the perspective of the government's fiscal balance, this may be offset by lower budgetary allocations to the SOEs on an annual basis.

Could off-budget borrowing by Danantara affect the sovereign credit profile?

If Danantara accumulates direct debt, it's unlikely we would automatically consider this to be within the general government's balance sheet and count it as general government indebtedness.

This depends, however, on the ultimate relationship of Danantara with the government, the type of funding raised by the agency, and the likelihood that Danantara's debt eventually crystallizes on the government's balance sheet.

We may consider Danantara's debt to be a contingent liability to the government if the agency issues debt with an explicit government guarantee, or if we consider the government likely to provide support for Danantara's financial obligations if necessary. In the event that the government itself ultimately becomes responsible for servicing that debt, due to a weakening of Danantara's ability to service the debt on its own for instance, it could then move into the category of direct general government indebtedness.

For example, government-linked firms in Malaysia such as Danainfra Nasional Bhd., Prasarana Malaysia Bhd., and Malaysia Rail Link Sdn. Bhd. accumulated sizable government-guaranteed debts over several years in order to fund off-budget capital expenditure programs related to public policy schemes. Some of those commitments ultimately crystallized on the government's balance sheet after the issuing firms had trouble servicing them.

We deem these to be "committed guarantees," and include them in our calculation of general government debt in Malaysia. In other words, we recognize they are being serviced by the government.

How could Danantara affect S&P Global Ratings' view of government support for the state-owned sector?

We believe the Indonesian government's capacity and willingness to support its SOEs remain unchanged at the moment. However, support differentiated across the entire sector, as the largest and most economically essential SOEs received timely and full support, whereas some smaller and commercially oriented SOEs have undergone default and restructuring in the past few years.

By centralizing the management of its large portfolio of SOEs, the government may improve the efficiency and provide a wider pool of capital to its sprawling state sector. This could result in more timely capital deployment to SOEs in need. Nonetheless, the additional layer of decision-making between the government and the SOEs could also raise questions about the continuity and timeliness of extraordinary support to the sector.

We lay out some markers to assess whether there could be any shift in government support:

Danantara's role in the oversight of the SOEs' financial and operating performance.  Does it have clear oversight responsibilities, or does it share this with other parties, thus raising potential conflicts of objectives and weaker coordination?

Whether Danantara has a clear framework for monitoring the performance of SOEs and providing timely financial support to SOEs in distress.  

Whether Danantara is expected to be the sole support entity or if the government will step in at any point,  especially if Danantara does not have enough means to provide sufficient timely support for the larger SOEs.

How could Danantara affect the stand-alone operations and finances of investee companies?

It's too early to say. Many details about Danantara's strategy, investment priorities and funding are unclear for now. In the previous structures, SOEs and subsidiaries of SOEs had varying degrees of independence in their operations and financial management from the government. Listed subsidiaries of SOE groups had more independence in their decision-making than their fully owned counterparts.

Useful markers to assess Danantara's interactions with its investee SOEs include:

Danantara's leverage tolerance,  in particular whether Danantara articulates clear policies around maximum leverage at investee companies as well as at the consolidated level;

Danantara's investment strategy,  including the nature and economic viability of new projects that could be undertaken by the agency;

The extent of arms-length transactions between Danantara and its investee SOEs,  in aspects such as dividend levels, and capital spending objectives, financial policies and whether Danantara will centralize individual SOE resources.

Danantara's objectives, investment strategy and potential responsibilities in supporting SOEs will determine if they retain their relative independence.

What could change for rated corporate SOEs?

We currently rate three corporate SOEs: Pertamina (Persero) PT (BBB/Stable/--) has a stand-alone credit profile (SACP) of bbb-; its subsidiary Kilang Pertamina Internasional PT (BBB/Stable) has a SACP of bb-; and PLN (Persero) PT (BBB/Stable/--), which has a SACP of bb-.

Pertamina and PLN are, in our view, Indonesia's two most important corporate SOEs. They play an essential role in the energy and power sector; fill a vital public service obligation for which there is no private sector substitute; and financial stress at either entity could cause reputational risk for the government.

This view remains unchanged. We equalize the issuer credit ratings on the two entities to the sovereign rating on Indonesia because we expect the likelihood of government support to be almost certain for both entities. We see a strong incentive for the government to preserve their credit quality.

We estimate the likelihood of a privatization of either entity as very low over the next three years at least because of the persistence of price controls and the reliance among both entities on timely government subsidies.

We anticipate the two companies will maintain their essential public service roles once the government transfers its ownership to Danantara. Our focus will shift to the proposed governance and support mechanisms for assurance that the additional layer between Pertamina/PLN and the government will not weaken the government's ability to provide support on a timely basis.

We are also seeking additional clarity on the subsidy payment and whether the subsidies will continue to be paid directly to both entities rather than flow through Danantara.

A more cumbersome support mechanism could lead us to review our assessment of the strength of these entities' "link" with the government. This is one of the two factors, along with the role, that we use to assess the likelihood of government support.

Danantara's influence on both SOEs is likely to be either through capital spending or dividend policies. In our view, Pertamina has more financial capacity to absorb accelerating capital spending or higher dividends, for example. PLN relies more on government support, including subsidized tariffs and deferred compensation payments; has higher leverage; and sizable capex plans.

How will Danantara affect the management, operation, and financial profile of the large state-owned banks?

For rated banks (table 2), the key credit considerations for us will be how Danantara influences lending priorities, risk tolerance and financial policies.

Table 2

Historically, the Indonesian government has balanced its significant influence on the state-owned banking sector (via board representation and executive nominations) against a strong commercial orientation. This commercial orientation afforded the largest banks healthy financial profiles, good profitability, enviable returns on assets averaging 2.5%, and strong capitalization.

A key question now will be on Danantara's investment prioritization and whether that could influence the lending patterns of the banking sector, especially if Danantara invests in less profitable long-term projects.

Dividend policies at banks and the extent to which Danantara relies on their resources to fund its own projects will be another focus. Such dividend payouts are already generous--50%-80% of net income. At Mandiri for example, a pick-up in loans growth during 2024 placed downward pressure on the bank's capitalization as retained earnings did not keep pace with loans growth.

The recent step-up in dividend payout to 65%-85% from state-owned banks could exacerbate downward pressure on their capitalization. In our view, the dividend increase appears calibrated - it could well be temporary and a means to provide initial funding to Danantara for its investments.

The profitability and viability of Danantara's investment strategy and new ventures will be essential. Profitable and self-sustaining investments are likely to limit the need for higher dividend upstreaming from banks.

We also believe the significant minority shareholdings in each of the rated state-owned banks can continue to act as a check and balance. They remain crucial for corporate governance as they provide diverse perspectives, ensure a balanced governance environment, and anchor the state banks to commercial objectives.

How will Danantara affect S&P Global Ratings' assessment of government support for the large state-owned banks?

Our expectations of government support to Indonesia's three largest state-owned banks remain unchanged. In short, it is anchored by the fact they collectively account for almost half of the banking sector's assets; and their very strong linkages with the government through majority ownership.

Like our view on support for corporate SOEs, we have typically expected the Ministry of SOEs and the Ministry of Finance to be the direct sources of government support for the banking sector, in the event of need.

As dividend payments are now diverted to Danantara instead of the ministries, it remains unclear if reference ministries will be willing to provide direct support, or if it will expect Danantara--as the main beneficiary of SOE dividends--to be the first line of defense in times of need.

Danantara is a sharp new tool. Its utility will depend on the hand--or hands--that wields it.

Editor: Lex Hall

Related Research

• Commentary: Banking Industry Country Risk Assessment: Indonesia, Dec. 3, 2024
• Criteria | General Criteria: Rating Government-Related Entities: Methodology And Assumptions, March 25, 2015