1MDB casts pall over looming Asian SWFs

With resentment against established political and business interests on the rise, sovereign wealth funds (SWFs) continue to face criticism from some quarters for their lack of transparency and, in extreme cases, outright corruption. Against that backdrop at least two new SWFs are being planned in Asia, in the Philippines and in Indonesia.

The recent experience in Malaysia with 1MDB showed that having a large pool of wealth at the disposal of government officials and politicians was not a recipe for good governance. Large losses at the state fund, which was set up and (until last June) chaired by Prime Minister Najib Razak, led to accusations of political corruption and international investigations.

It is understandable that other countries would want to avoid a similar fate.

Legislators in the Philippines and Indonesia are weighing the damage wrought by the 1MDB scandal as they consider creating new SWFs.

The two countries face political challenges in the establishment of their funds and in how they will be run. Given historical abuses of power and corruption allegations that have plagued both countries (Indonesia and the Philippines rank 88th and 95th, respectively, on Transparency International’s Corruption Perceptions Index), demands for operational clarity seem justified. 

Philippine SWF preparations

Jesse Cruz, chief executive of Sovereign Wealth Funds Research and Advisory, based in Manila, told AsianInvestor that she expected the Philippines’ new SWF to go live this coming June. President Rodrigo Duterte has to approve the project, so Cruz said the immediate challenge was to get the president’s attention.

But it was potentially a matter of just a few months, she added. “If it can be processed properly, we expect it to pass as a bill sometime in April, then the president will need to sign it."

Whatever happens, the fund is likely to face political scrutiny into the direction of its investments, unless it can be established with complete independence. Even in politically stable nations like Singapore and New Zealand, controversy is never far away when it comes the management of sovereign assets.

Globally, SWFs have no shortage of critics, particularly in the academic field. "Too few sovereign investors have acknowledged that the money in these funds is ultimately the property of citizens, not their governments," said Angela Cummine, a director of the wealth project unit at Oxford University in the UK. 

She believes SWF management boards should be elected by the public at large, or their political representatives, and all fund proceeds should be paid out as a public dividend to all eligible citizens. That clearly goes against the idea of a fund that is created to buffer future pension funding requirements and would also compromise a stabilisation fund which, while investing for the long term, is also designed to insulate government finances and the economy from major fluctuations in the global flow of capital.

Indonesian holding company

Indonesia’s government is also thinking of combining various state entities under one holding company, with a view to investing in domestic corporates and infrastructure projects, potentially some time this year. The fund is expected to allocate overseas as well.

A holding company of Indonesian state-owned enterprises has wide support, but getting it up and running will not be easy, said Jemmy Paul Wawointana, chief investment officer at Sucorinvest Asset Management in Jakarta.

For one thing, the country lacks qualified managers.

“They will have to bring people in from outside because they don’t have the experience in Indonesia,” Wawointana said. “I see a lot of private company directors going to work at the SOEs [state-owned enterprises], which is good. But they will need outside help.”

Wawointana’s previous experience of dealing with SOE directors in the country has left him sceptical of their business ethics.

“What I learned is there is a lot of corruption,” he said. “But there’s light at the end of the tunnel; the sovereign wealth fund will be professionally run and will probably reduce the level of corruption.”

Georg Inderst, a leading European adviser to sovereign funds, believes state-run funds all start with the best intentions but face heavy challenges.

“In particular, the risk of political interference, the vagaries of electoral cycles and the tendency to bureaucratisation. This can lead to [the] misallocation of resources or even fund raids,” he said in a paper issued in September. “Transparency is key, especially since SWFs are to a large extent outside the usual supervisory regimes for institutional investors.”