📒 Quick Take: Asian Sovereigns’ Tug of War
State-linked entities across India, Indonesia and China are caught between performing their national duty and reining in leverage.
India is reportedly considering a USD 12 billion bailout for its state-run power distributors.
Indonesia’s Finance Ministry is speeding up payments to PLN and Pertamina, while having to provide fiscal support for a debt-laden rail project.
China is trying to gradually defuse its LGFV risk, but local governments are intertwined with the property sector.
State-linked entities across India, Indonesia and China are caught between performing their national duty and reining in leverage.
This tug-of-war has long been a feature in the sovereign space, but now the stakes are higher because of the growing pile of debt to cover the costs of building infrastructure and subsidizing public services. Some of these state-linked entities loaded up on debt to bridge the funding gap as they were barred from raising prices.
Despite three federal bailouts worth billions of dollars over two decades, India’s state-run power distributors had accumulated INR 7.08 trillion (USD 80.6 billion) in losses and INR 7.42 trillion (USD 84.4 billion) in outstanding debt as of March 2024, according to Reuters.
India is considering a bailout of more than INR 1 trillion (USD 12 billion) for these companies, Reuters reported, citing three government officials and a document outlining the plan prepared by the Ministry of Power. To receive the funds, the states will be required to privatize their electric utilities and transfer managerial control, or keep control but list them on a stock exchange.
In Indonesia, state-owned electricity distributor Perusahaan Listrik Negara (PLN) was also mandated to keep tariffs affordable. PLN is supposed to receive “compensation income” from the government as reimbursement, but delayed payments would risk straining its cashflow.
The new Finance Minister, Purbaya Yudhi Sadewa, announced last week that he would speed up the compensation payment to PLN and state-owned energy giant Pertamina. While this should bring some relief to the SOEs, the Finance Ministry has to juggle competing demands even as Indonesia’s economic growth slowed to 5.04% in the third quarter.
Back in April, I flagged that the construction of the Jakarta-Bandung high-speed rail – known as Whoosh – carried a roughly USD 7 billion price tag that may keep ballooning. I also noted last month that Sadewa had insisted that Whoosh was the responsibility of Indonesian sovereign fund Danantara, not his ministry.
However, President Prabowo Subianto told reporters this week that the joint venture operating Whoosh, Kereta Cepat Indonesia China (KCIC), will receive support from the state coffers after all. Given that the boss has weighed in, the finance minister will likely have to cough up the fiscal support.
And in China, I wrote last month that local government financing vehicles (LGFVs) were tasked to raise funding for key projects, but many of them went out of control and ended up creating a debt mountain. I also noted that China seems to be weeding out the weaker LGFVs, akin to gradually releasing steam from a pressure cooker.
The officials are probably keen to avoid the property implosion triggered by the implementation of the “three red lines” policy five years ago. However, many local governments are intertwined with the property sector, as they relied on land sales for income while the developers were a significant source of employment.
Chinese real estate is also not out of the woods yet, as even China Vanke – which was previously seen as one of the stronger developers because of its state backing – has been spiralling downwards. Vanke’s bonds plunged this week after its state-owned shareholder, Shenzhen Metro Group, requested collateral or pledges for previously unsecured loans totalling CNY 20.4 billion (USD 2.9 billion).
If there’s any consolation for these Asian state-linked entities, it’s that they’re not alone in their struggle to make money.