Earlier this year we wrote about Indonesia’s decision to kick JPMorgan off the primary dealer list following an unflattering macroeconomic equities report. We took the view that Indonesia had mis-stepped.
While we have not yet managed to secure an on-the-record interview from the finance ministry to understand its side of it, conversations in Jakarta with those close to the situation are revealing.
The background: in November, JPMorgan emerging markets equity strategist Adrian Mowat put out a report looking at several countries in light of the Trump election win, downgrading Indonesian equities to underweight and also downgrading Turkey and Brazil in the same report, arguing that volatility following the election would increase emerging-market risk premia and potentially reverse investment flows.
This so enraged Indonesian minister of finance Sri Mulyani Indrawati that JPMorgan was removed from the primary dealer list for Indonesian government bonds, a role that it shared with several domestic banks, as well as Citi, Deutsche, HSBC and Standard Chartered. All these banks were then summoned to the ministry in January, after which new rules were imposed, requiring them to: “Safeguard the partnership with the Indonesian government based on professionalism, integrity, the avoidance of conflict of interest, and looking at the interests of the Republic of Indonesia.”
Here is what we have learned.
1. It was not about some other JPMorgan indiscretion. The idea of scrubbing a bank from a debt distribution mandate because of an anodyne equities call has seemed so odd to many observers that a theory has become widespread: that JPMorgan must have done something else and the equity call provided an opportunity to discipline the bank without disclosing the indiscretion. Euromoney understands this is not the case, it really was about the equity call.
2. Mulyani was riled about Brazil. Euromoney understands that minister Mulyani was particularly angered that Indonesia’s downgrade, from overweight to underweight, was one notch greater than that for Brazil, from overweight to neutral. Mulyani has been to Brazil recently and is understood to believe the country to be facing worse challenges than Indonesia. JPMorgan would argue that valuation is the point, not overall economic outlook.
3. It is partly about the bank making money from volatility. It is understood that two banks – JPMorgan and Deutsche – make more than their primary dealer peers from trading debt securities. While no explicit suggestion has been made of impropriety, it is understood that the ministry does not like the fact that foreign banks benefit from volatility (in terms of trading volumes) while contributing to that volatility with market calls from their research departments.
4. There is a sense of expected support. The ministry expects its primary dealers to be supportive of the country. Officials reject the view that this will make research on the country from primary dealers meaningless. JPMorgan’s subsequent reversal of its underweight recommendation does not appear to have got it back into the fold.
5. JPMorgan is probably out of action for a year or more. The bank is highly unlikely to appear on any debt mandates – including sovereign international capital markets issues – for at least a year.
For the other primary dealers, it is helpful for the moment that the outlook on the country is broadly positive. Commodity prices are recovering, the tax amnesty bolstered budget spending on infrastructure and the domestic consumption-led economy is buoyant. Nobody has yet had to write a negative call. But good times do not last for ever; it will be revealing to see how these banks respond when that time comes.
A key promise of the Jokowi administration has been to improve Indonesia’s infrastructure: budget commitments are at record levels and there are projects under development all over the country. But it is still not easy.
Sandiaga Uno, co-founder of Saratoga Investama Sedaya and now a candidate for deputy governor of Jakarta, recalls one project when he bought the same piece of land not once, not twice, but three times. Two certificates existed for the land attributing it to different owners and then someone else turned up with a family tree dating to the pre-Dutch era. “We haggled. But it took us almost nine months; at the end of the day we had to settle it.”
Uno, through Saratoga, was part of the investor and developer group for the Cikampek-Palimanan Toll Road, or Ci-Pali, which was opened with much fanfare by Jokowi in June 2015 and is now held up as a model for innovative infrastructure financing in Indonesia.
But Uno recalls: “The project was started by president Suharto” – the strongman who ruled for 31 years before being ousted in 1998. This is to say, the project pre-dates democracy in Indonesia. He lists the presidents who came and went before the project finally opened: “Habibie, Gus Dur [Abdurrahman Wahid], Megawati, SBY1, SBY2 [the two terms of Susilo Bambang Yudhoyono], Jokowi.”
What got it over the line in the end? Part of it was progress on land acquisition following the passage of a new law, but Uno recalls this was not straightforward either. There were Muslim boarding schools along the route, he says, that accepted the legal right to move them, but told him: “The last time somebody tried to take the land from us was in 1825. Then, we declared war.
“Please don’t make us declare war on you.”