(Oct 31): Days after taking charge of Southeast Asia’s biggest economy, Indonesia’s president needs a plan to deal with rising borrowing costs for key state-owned enterprises (SOEs) carrying US$186 billion (RM814.49 billion) of debt.
Former general Prabowo Subianto needs to fix the balance sheets at companies including the national carrier and biggest steelmaker, after his predecessor spent US$800 billion on an infrastructure push that sent many state builders’ debt to record levels. The challenge is heightened by a government grappling with a decades-old question of just how involved it should be in an economy where it still operates hotels and drug stores.
“We have to dedicate our focus to the basic problems,” Burhanuddin Abdullah, a former central bank governor and adviser to Prabowo’s campaign team, said last month, referring to the fiscal capacity the new government has. He estimates there is as little as 1,100 trillion rupiah (US$70 billion or RM306.81 billion) in government coffers after debt servicing and the required fund transfers to regional governments. “That’s not much. The president can’t do much with that.”
That could prompt the Prabowo government to keep relying on state firms to execute priority programmes — a similar tactic used by his predecessor. State-owned builders PT Waskita Karya and PT Wijaya Karya built up liabilities to over US$9 billion collectively under former president Joko Widodo (Jokowi) and had to restructure the unsustainable amount of debt since 2023. At least two other major SOEs also revamped their debt in recent years, while state-owned pharmaceutical company PT Indofarma went into distress this year and failed to pay salaries to its workers amid fraud allegations.
Other state firms are paying the price for growing investor concerns as a result. State builder PT PP had to pay 211 basis points more in spreads over government debt for a rupiah bond sale this year compared to its issuance two years ago. That’s despite the spreads on other firms’ notes with similar tenor and ratings tightening by about 51 basis points in the same period. Similarly, builder PT Adhi Karya paid 220 basis points more in spreads for a note sale compared to its 2022 issuance, while similar bonds’ spreads were largely unchanged.
At least two local fund managers who spoke with Bloomberg News and who have invested in the local-currency bonds of construction companies that restructured debt have since avoided other state-owned builders, even those that never restructured or defaulted on their debt, they said.
The proportion of rupiah-denominated bonds issued by state-owned companies dwindled to just 25% of the total local-currency issuance in the country so far this year, according to data compiled by Bloomberg. When Jokowi started his second term in 2019, state firms accounted for more than half of the local primary market.
“The deteriorating confidence in SOEs will put a strain on their ability to source funds from public markets and investors, growing their dependence of SOE banks,” said Alessandro Gazzini, the head of Indonesia at corporate restructuring adviser Alvarez & Marsal Inc.
That comes as the new president is eying a world-beating 8% economic growth target, an ambitious goal that’s reliant on state firms’ help. The government needs the state-owned companies to keep building more roads connecting the island as well as to execute a plan to build a new capital city.
“The government’s dependency on state-owned companies to help push through strategic programmes such as infrastructure will grow,” according to John Teja, the president director of local brokerage PT Ciptadana Sekuritas Asia. “It is critical for the government to improve the balance sheet of these companies, and the quickest way to do that would be through additional capital injections.”
While Prabowo’s Cabinet hasn’t commented on the debt issue since taking office last week, the SOE ministry has been working on a plan that the new administration may implement to restore confidence in its firms. The plan, which is part of the ministry’s restructuring work since 2023, includes options such as providing additional capital to some of these companies, merging the troubled ones into a healthier parent and forcing them to specialise their work instead of competing with each other and causing a price war, according to a person familiar with the plan. The discussions are ongoing and the plan isn’t final, the person added.
Representatives of Waskita Karya, Wijaya Karya and Indonesia’s SOE ministry didn’t respond to Bloomberg News’ requests for comment.
When responding to Bloomberg News’ requests for comment, state builder PP’s finance director Agus Purbianto said the firm’s wider spreads on its latest bond offering were due to low demand from investors, partly due to a lack of confidence in the construction sector. He said the company will try to shore up investor confidence by improving its finances, selling some assets and teaming up with strategic investors to lower the company’s leverage.
Adhi Karya’s corporate secretary Rozi Sparta said negative sentiment from investors towards state-owned construction companies had affected the company’s access to the bond market, forcing it to offer wider spreads.
Not fixing SOEs’ debt issue in a timely manner also risks hindering the nation’s private sector. State firms’ funding restraints will lead them to grow reliant on state-owned banks, potentially crowding out the funding access of private firms and indirectly dampen global investors’ appetite to enter Indonesia, according to A&M’s Gazzini.
“The long-term implications for Indonesia’s economic development model is substantial,” said Gazzini. “Essentially, the most unproductive companies are growing their presence in the economy. This will create a negative impact in actual new job creation and incremental value-add economic development.”
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