JAKARTA (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, Suharto.
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 sovereign bonds.
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 abated.
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”.
The 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 last year.
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 said.
On 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 Bill Tarrant