|Opposing view: Indonesia's minister of finance Sri Mulyani Indrawati|
The Indonesian government’s stoush with JPMorgan over a November equities research note does not reflect well on a government that has otherwise won praise for market reform.
Indeed, it seems illogical – based on the facts as presented – that one has to wonder if some deeper and as yet unrevealed reason is to blame.
The background: on November 13, emerging markets equity strategist Adrian Mowat in Hong Kong put out a report on the back of the Trump election win, downgrading Indonesian equities to underweight – and downgrading Turkey and Brazil at the same time.
“There are losers from Trumponomics,” Mowat wrote, noting that the spike in volatility that Trump’s victory brought would increase emerging market risk premia and could reverse investment flows.
Indonesia, with a particularly high level of foreign ownership of local assets, was considered particularly vulnerable. The recommendation was, Mowat said, tactical: “We think you will get a better buying opportunity.”
There are rumours that the central bank disagrees with the ministry on its actions, and that calls have been made at the highest levels
In the bigger scheme of broker research, it was pretty harmless stuff. However, it enraged Indonesia’s ministry of finance sufficiently to remove the bank from its primary dealer list for Indonesian bonds, in effect also removing it from underwriting roles on sovereign issues, including international ones.
It has since become clear this action came from the top, as minister of finance Sri Mulyani Indrawati not only defended the ministry’s action but said she would add a condition to agreements with primary dealers to remind them to ensure their “professionalism, accuracy of information and freedom from conflicts of interest”.
She said JPMorgan had “provoked irrational behaviour” by making negative comments at a sensitive time.
If that’s really all there is to it, this is a huge and counter-productive over-reaction. It also makes little sense.
If the argument is that brokers can’t say anything negative about Indonesia, that helps nobody. Mulyani, and Indonesia in general, have been associated with greater, not lesser transparency; Mulyani is an ex-World Bank managing director with a reformist reputation that survived an earlier stint as finance minister.
This magazine, a long-standing admirer, awarded her for her outstanding contribution to finance in 2008.
Any market hoping to retain foreign flows in its assets, and perhaps to attract more, needs a certain amount of openness of information, including the freedom to criticize. If investors don’t think they can trust the independence of research, they’re likely to ignore it, and from that it’s a short step to ignoring the whole market.
Mulyani knows that; it simply can’t be the reason.
If the argument is that JPMorgan had a conflict of interest, it’s not clear how. Perhaps if the offending report had been about Indonesian debt, it might make some sense, but this was a macro report with a temporary tactical recommendation on equities, bundled up with other countries and with the suggestion it will be reversed when valuations are more attractive.
And if there was a conflict of interest between a primary dealer selling bonds and a research arm assessing them, wouldn’t it be a bigger conflict if JPMorgan was telling people to buy them?
Even some of the most experienced brokers in Indonesia have been taken aback by what has happened. They themselves are no strangers to being summoned to the ministry for a dressing down, or at least to hear pleas to be more sensitive in their coverage. However, being axed from the front line of new issues is a whole other step.
Most think this has to do with longer-term dissatisfaction with JPMorgan and Indonesia, and perhaps this is closer to the truth. It is true that some articles, particularly from Barron’s, have jumped on previous JPMorgan calls on Indonesia and created some noise around them, which might have riled the ministry.
And some local brokers say there is annoyance that banks such as JPMorgan and Deutsche have, they believe, made a lot of money dealing in Indonesian bonds, sometimes gaining from volatility that Indonesia itself could do without.
Under this analysis, the ministry had been waiting for an opportunity to kick a primary dealer to make a point, and this provided it.
Mulyani might also be making a stand against what she sees as feeble Chinese walls in western investment banks. It’s not clear yet what other primary dealers in Indonesian bonds – including Deutsche, Standard Chartered and Citigroup – are going to do about their own research, but it’s unthinkable that regional strategists won’t be able to express a broad market view on the country’s stock markets.
There are rumours that the central bank disagrees with the ministry on its actions, and that calls have been made at the highest levels. Clearly, Indonesia fears volatile flows – it suffered as much as anyone in the 2013 taper tantrum – but this is not the way to shield the country from them.