Indonesia penalizes JPMorgan for 'underweight' call: officials

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[January 03, 2017]  By Nilufar Rizki and Eveline Danubrata

JAKARTA (Reuters) - Indonesia will drop JPMorgan Chase & Co from providing some services to the government after the bank's research arm said investors should reduce their exposure to the country, senior finance ministry officials said on Tuesday.

"After we did a comprehensive review, we said no need to use JPMorgan's services as a primary (bond) dealer and a perception bank," Suahasil Nazara, the head of the ministry's fiscal policy office, told Reuters.

A 2006 government decree says a perception bank is one appointed by the finance minister to receive transfers of state revenue not related to imports, including tax, onshore excise and non-tax revenue.

Nazara said the penalty on JPMorgan <JPM.N> was already in effect.

In an equities research note dated Nov. 13, JPMorgan downgraded its investment recommendation on Indonesia to "underweight" from "overweight", citing higher risk premiums for emerging markets after Donald Trump won the U.S. presidential election.

"Bond markets are starting to price in faster growth and higher deficit," the bank wrote, adding that the "spike in volatility" may stop or reverse flows into fixed-income assets in emerging markets.

However, the bank said in the note that the downgrade on Indonesia and Brazil was a "tactical" response to Trump's victory. Both economies are improving, with lower policy rates likely to support valuations for 2017, it added.

A JPMorgan spokeswoman said on Tuesday that it continued to operate its business in Indonesia as usual. "The impact on our clients is minimal, and we continue to work with the Ministry of Finance to resolve the matter," she said by email.

The finance ministry's Nazara said the bank's analysis "did not make sense" because it recommended a "neutral" position for Brazil, which is better than for Indonesia, despite what he said was a more stable political situation in the Southeast Asian nation.

"We have asked them to clarify their assessment. They've explained to us, but we found their argument not credible. It's not that we think we're so great, but we look at ourselves and we look at other countries' economies," Nazara said.

"Our mindset is, if you're doing business here in Indonesia, the spirit is to maintain stability. Don't create unnecessary volatility to create business," he added.

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A view of the exterior of the JP Morgan Chase & Co. corporate headquarters in New York City May 20, 2015. REUTERS/Mike Segar/Files

Robert Pakpahan, Indonesia's director general for budget financing and risk management, told reporters on Tuesday that JPMorgan's research should not have a major impact on Indonesia's future bond issuance, but the sanction on JPMorgan would remain in place "until we say otherwise".

Primary dealers of Indonesian government bonds as of Nov. 25 included Citibank, Deutsche Bank AG, Hongkong and Shanghai Banking Corporation Limited and local lender PT Bank Central Asia Tbk, according to the finance ministry's website. (

Indonesia's 10-year credit default swap, a contract used to measure credit risk in fixed-income products, and the yield on its benchmark 10-year bonds spiked after the U.S. election, though they have since dipped.

Trump signaled more protective U.S. trade policies, raising concerns about the impact on developing markets.

Analysts have said Indonesia's economy should be supported by domestic consumption, which makes up more than half of gross domestic product.

But the relatively high foreign ownership of government bonds and Indonesia's lack of depth of financial markets make it vulnerable to capital reversals, they say.

Indonesia's central bank said shortly after the Federal Reserve raised U.S. interest rates in December that it was on guard against "reversals" of capital flows into the country.

However, Fitch Ratings revised in December Indonesia's credit rating outlook to positive, citing a relatively low government debt burden, favorable growth outlook and an improving business environment.

(Reporting by Nilufar Rizki and Eveline Danubrata; Additional reporting by Gayatri Suroyo, Hidayat Setiaji and Fransiska Nangoy; Editing by Richard Borsuk and Will Waterman)

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