‘Patriot Bonds,’ an Indonesian Shakedown?

Prabowo risks alienating international investors

One might think that Indonesia’s President Prabowo Subianto would have learned lessons from the careers of his father, Sumitro Djojohadikusumo, one of the architects of Suharto’s mostly successful orthodox economic agenda, and his grandfather, Margono Djojohadikusumo, the founder of Bank Negara Indonesia, the country’s first central bank.

But with widely respected technocrat Sri Mulyani Indrawati fired from her post as finance minister last month, a mix of grandiose ideas and off-kilter deals is raising increasing doubts about whether Indonesia can sustain its growth rate of roughly 5 percent in recent years, let alone achieve Prabowo’s lofty 8 percent goal.

It is not just that new finance minister Purbaya Yudhi Sadewa clearly believes that the central bank should not be allowed to stand in the way of a dash for growth. That is a debatable issue given the two decades of cautious monetary and fiscal policy that followed the 1997-2000 Asian financial crisis. Maybe Purbaya’s US$12 billion injection of funds into the banking system to encourage lending growth may not be such a bad idea.

There is little sign of a surge in government spending. Indeed, the approved 2026 budget shows only a deficit of 2.7 percent of GDP, still below the legal limit of 3 percent, and a modest GDP growth target of 5.4 percent, about the same as this year. Prabowo’s 8 percent target is a harmless mirage. In reality, Indonesia will likely push along with stable if unremarkable growth, low (by past standards) inflation and a stable, if sometimes nervous, currency. But the downside dangers have increased.

Yet how can anyone believe that Indonesia is being run on the basis of open, reliable principles when it strongarms local tycoons into buying US$3 billion in five and seven year so-called Patriot bonds issued by national investment fund Danantara? They yield 2 percent compared with market rates on government bonds of around 5.5 percent to 6.3 percent. Those leaned on for this money-losing proposition apparently include Prajogo Pangestu of Barito Pacific, Anthony Salim of Salim Group, and Franky Wijaya of Sinar Mas, among many others. The claim that this is a voluntary contribution rings very hollow.

This comes against the wider backdrop of what is perceived as a general hostility on the part of the government toward tycoons, one example of which is the September arrest of Nadiem Anwar Makarim, one of Indonesia’s brightest business stars and the founder of GoJek, the ride-hailing service that changed the business landscape in the country. Nadiem is a suspect in a corruption case tied to the government’s digital education program when he was Minister of Education, Culture, Research, and Technology. The crime? The ministry purchased cheap Chromebook laptops for schools, some of which did not function well without reliable internet connections in rural areas. This may have been a mistake but hardly a felony.

Many observers in the business community liken Nadiem’s problem to that of former trade minister Thomas Lembong, who was sentenced eight years after the fact to 4½ years in prison and fined Rp750 million (US$46,000) for improperly granting sugar import permits despite an acknowledgement that Lembong hadn’t profited personally as trade minister. He was later granted legal clemency by Prabowo and freed. It is widely acknowledged that Lembong was punished for being a vocal and effective opponent of former President Joko Widodo.

The Patriot Bond money will supposedly go to a good cause, namely waste-to-energy power projects to help reach the national goal of net zero emissions by 2060. But that is beside the point. The tycoon targets are indeed very rich and may have got that way by bending rules and avoiding taxes – often with official help. But instead of enforcing stronger rules and pursuing violators though regular channels, Prabowo has opted for a mafia-style shake-down.

At the very least, the scheme amounts to selling the promise of political protection for those who cough up. This is true to the reputation for thuggery that Prabowo established in East Timor in 1983, when he was with Kopassus (Special Forces) and then, as head of Kostrad during the 1998 disturbances which brought down his father-in-law, Suharto. More recently, he seems to have been taking lessons from US President Donald Trump and Turkish leader Recep Tayyip Erdoğan

If the Patriot Bonds scheme is a one-off event, it might soon be forgotten, but perhaps not by the foreign investors who own about 14 percent of government debt and 40 percent of traded stocks. Is this still a rules-based system? Or does every deal have a political ingredient? As it is, as recently revealed by Transparency International Indonesia, politicians, particularly those from Prabowo’s Gerindra party, have an oversized presence as Commissioners of State-Owned Enterprises (SOEs). There is also an issue with Commissioners holding concurrent ministerial positions.

The latter anyway are now more or less subject to Danantara, the national wealth fund created by Prabowo out of SOE assets, which has direct oversight and access to the cash flows of all SOEs including large and profitable state banks, Bank Mandiri, Bank Rakyat, and Bank Negara, as well as oil giant Pertamina and Telekomunikasi Indonesia.

It is too early to judge the actual performance of Danantara but the Patriot Bonds are not encouraging, nor is the appointment of the likes of former Thai prime minister and notorious wheeler-dealer Thaksin Shinawatra to its Advisory Board. While some liken Danantara to Singapore’s Temasek Holdings, others fear it may be closer to that of Malaysia’s 1MDB, an exercise in using “national development” as a cover for individual deal-making. The latter seems unlikely, but any more Patriot bond episodes will confirm that Danantara is driven as much by politics and special deals as by investment criteria.

For private investors, Indonesia continues to offer an alluring growth combination of demographics and natural resources. But the harder it tries to force the pace with special deals and costly presidential projects, the harder it will be to maintain 5+ percent growth, let alone reach 8 percent.