The Rise of the Trophy Sovereign Wealth Fund

Everybody wants sovereignty. Everybody wants wealth. Yet, a fund is not, sadly, a reliable route to their creation.

- Robin Harding

Danantara, the new sovereign wealth fund in Indonesia, is a project of surpassing ambition. Taking possession of US$900 billion (S$1.2 trillion) in public assets, it will divert about 0.6 per cent of gross domestic product a year from the state budget to invest in business schemes such as mines, battery factories and data centres — priorities for President Prabowo Subianto — with almost total freedom over where and how it deploys the capital.

Within a few years, it should become a player in global capital markets. Remember the name: Danantara. You are likely to hear it often.

More questionable is whether the project's ambition is matched by its wisdom. Danantara has no discernible macroeconomic purpose. Rather, it is one of a new breed of trophy SWFs — such as the UK's National Wealth Fund and a possible US fund from the Trump administration — created largely for the sake of having them.

Everybody wants sovereignty. Everybody wants wealth. Yet, while a fund is a fine way to manifest them, it is not, sadly, a reliable route to their creation.

Consider the many cases in which a sovereign wealth fund does make sense. First, to save windfall gains from natural resources such as oil into offshore assets, thereby spreading the benefits over time and preventing exchange rate appreciation, with the resulting destruction of other economic sectors by the so-called "Dutch disease". Norway's fund, the world's biggest, is the obvious example.