Indonesia's worried about
market 'psychology' with JPMorgan report
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[January 20, 2017]
By Eveline Danubrata and Gayatri Suroyo
(Reuters) - Indonesia's reform-minded finance minister seemed to invoke
memories of the 1997-98 Asian financial crisis this week when explaining
why she came down so hard on JPMorgan Chase & Co for downgrading the
country's equity market.
JPMorgan published a research report on Nov. 13 that gave Indonesia an
underweight assessment, just as Southeast Asia's biggest economy was
seeing an outflow of funds along with other emerging markets after
Donald Trump's victory in the U.S. election.
Finance Minister Sri Mulyani Indrawati, a former International Monetary
Fund director and World Bank managing director, thought the downgrade
could fuel a stampede out of the country's assets.
There may be a "herd mentality" during a situation of panic in financial
markets, "so if someone shouts fire, everyone runs and then there's a
stampede," she told a parliamentary committee this week.
That is exactly what happened during the 1997-98 "Asian Contagion"
financial crisis, when economies from Thailand to South Korea and
Indonesia collapsed as foreign investors pulled capital from the region.
Indonesia was the worst hit: a death spiral in the rupiah triggered a
banking crisis, bankruptcies and rising unemployment - and in a matter
of months had toppled the country's longtime autocratic president,
The U.S.-educated Indrawati shocked the financial community by cutting
all business ties with JPMorgan after the November research note,
including its role as a primary dealer and underwriter for Indonesia's
She also signed new rules on Dec. 30, requiring all primary bond dealers
to adhere to "a principle that is aligned with the government" and avoid
"conflicts of interest".
She said those conflicts arise when partners "receive business from the
government, but on the other side they do something that is different
from the government's own interest".
Indrawati defended her crackdown on JPMorgan, saying that alongside
fundamental economic factors, investors are influenced by psychology and
perception, which is "sometimes very subjective".
Achmad Sukarsono, an analyst at consultancy Eurasia Group, called
Indrawati's moves "a wake-up call for investors that even the most
reformist official in Indonesia is taking a political approach to policy
and has no qualms about punishing negative opinion."
Indonesia is particularly vulnerable to a foreign stampede out of its
markets: foreigners owned 37.55 percent of its government bonds at the
end of 2016.
In November, foreigners sold nearly 32 trillion rupiah ($2.4 billion) of
Indonesian stocks and government bonds, according to data from the
finance ministry and the stock exchange, though the selling has since
Before Indonesia's punishment, JPMorgan was a primary dealer. That meant
it was allowed to buy government bonds in auctions and resell them in
the secondary market. Indonesia had 19 such dealers including Citibank,
Deutsche Bank A.G. and HSBC as of Nov. 25.
In its Nov. 13 report, JPMorgan downgraded Indonesian stocks to
"underweight" from "overweight", citing higher risk premiums in emerging
markets after Trump's win. Malaysia received an "overweight" assessment
and Brazil a "neutral".
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A man walks into the JP Morgan headquarters at Canary Wharf in
London May 11, 2012. REUTERS/Dylan Martinez/File Photo
finance ministry's head of fiscal policy, Suahasil Nazara, said Indonesia did
not deserve a recommendation that was lower than Brazil, after the South
American country impeached its president and suffered an economic contraction
JPMorgan executives were caught off-guard by Indonesia's reaction to what they
saw as a routine report that was not particularly critical of government
policies, said a person with direct knowledge of the matter.
Over a series of meetings, JPMorgan analysts sought to assure Indonesian
officials the change in the bank's assessment on Indonesia was a "tactical"
portfolio rebalancing tied to global factors, people familiar with the matter
Monday, JPMorgan upgraded its recommendation on Indonesian stocks to "neutral",
saying that "bond volatility should now decay" after funds sold a large amount
of bonds and equities in emerging markets.
A JPMorgan spokeswoman said Indonesia's move against the bank had not influenced
the upgrade. "JPMorgan's research is independent and anything published is a
result of extensive and objective analysis."
Other emerging market countries have tried to retaliate against unfavourable
research, including against Morgan Stanley in China and Banco Santander in
Brazil, although the pressure has usually been less explicit than what JPMorgan
in Indonesia faced.
Indonesia's finance ministry came down hard due to its perception of JPMorgan as
a repeat offender, officials said.
In 2015, while Indonesia was grappling with its weakest growth in six years and
a market sell-off, Barron's news site picked up a JPMorgan report and ran it
with the headline "JPMorgan: Sell Indonesia Bonds, Rupiah NOW".
Indonesia's then finance minister, Bambang Brodjonegoro, dropped JPMorgan as an
underwriter for its U.S. dollar-denominated bonds, a person with direct
knowledge of the matter said.
The government relented after JPMorgan said its report had been misrepresented,
said the person, who declined to be identified.
Barron's subsequently corrected its report to say JPMorgan had cut its
recommendation on Indonesia's bonds to "underweight". Barron's did not respond
to requests for comment.
(Additional reporting by Hidayat Setiaji, Fransiska Nangoy and Cindy Silviana in
JAKARTA and Sumeet Chatterjee in HONG KONG; Writing by Ed Davies. Editing by
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