Last Tuesday, the Indonesian finance ministry said it was cutting its business links with JP Morgan as the lender’s comments could harm its financial system.
The comments in question were made in November, when JP Morgan cut its recommendation for Indonesian equities to underweight from overweight. Their reasoning was “tactical” and came in response to the impact on emerging markets from Donald Trump’s victory in the US election, said the report. In the same note, Brazil was also downgraded from overweight to neutral.
The research might well have easily been lost in the mountain of end of year outlooks and opinion pieces written by every bank. But Indonesia’s heavy handed approach to JP Morgan’s analyses has ensured it has captured the market’s attention.
The ministry of finance first said that large institutions need to be held responsible for the attitudes they create with their statements, with another senior official reportedly saying that JP Morgan’s research was not “accurate or credible”.
The result was that the government is understood to have suspended the bank as a primary dealer and underwriter of its domestic and international bonds from January 1, despite the report only dealing with the country’s equities market. A bank spokesperson told GlobalCapital Asia last week, and reiterated again on Tuesday, that its business in Indonesia continues to operate as usual and that it was working with the ministry to resolve the matter.
On top of that, the country is now understood to be planning regulations to ensure its primary bond dealers only produce “factual” research, with the rules expected to be released next week, according to media reports quoting Robert Pakpahan, the finance ministry’s director general for budget financing and risk management.
Spokespeople at the finance ministry did not respond to requests for comments in time for this article.
The amount of effort Indonesia has put into detracting negative reports has raised some concerns about what it’s trying to suppress, while also raising fears among other researchers that they too would be penalised for negative commentary.
Market watchers contacted by GlobalCapital Asia this week unanimously agreed that JP Morgan made the right call in standing by its analysis. But it is Indonesia’s reaction that has not only set a bad precedent for the region, but could also likely backfire.
For starters, Indonesia shouldn’t forget about the demographics of its investors. A huge chunk are international, which are already scrutinising emerging market investments in the wake of Trump’s election victory and the likelihood of more interest rate hikes. Indonesia is one of the Asian economies that is vulnerable to capital outflows.
In addition, Indonesia’s ruling could impact equity buyers, especially retail investors that rely on such research to better gauge their portfolio choices. If analysts are hesitant to provide critical views on the country’s stocks, there is a chance of investors jumping into equities with limited knowledge of the risks, and having their fingers burnt in the process.
Indonesian officials are only trying to safeguard their economy. And on the debt side, the consensus is that the government’s planned fundraising for the year is unlikely to be hurt given it is viewed as a savvy and well established bond issuer.
But Indonesia should not look complacent, even if it is viewed more positively when compared with other emerging markets in Asia. It is not the only country likely to face volatility in 2017 in the wake of global political uncertainty.
The country needs to go into the year by embracing its strengths, not making an investment bank the scapegoat for its perceived weaknesses and looking like it has something to hide.