We officially have a new definition ot “thin-skinned”.
In what may be one of the most dramatic retaliations to a downgrade report, Indonesia’s government said it has terminated all business partnerships with JPMorgan Chase after the U.S. bank downgraded its outlook on stocks in Southeast Asia’s largest economy. The finance ministry announced it would stop using JPMorgan as a primary dealer and as an underwriter of its sovereign bonds, Robert Pakpahan, the ministry’s director-general for budget financing and risk management told reporters in Jakarta on Tuesday. The reason: Pakpahan said a November research report issued by the bank was not “accurate or credible.”
JPMorgan downgraded Indonesia’s equity market by two notches to underweight from overweight in a Nov. 13 report as a “tactical response” to the Trump election win. The bank also downgraded Brazil, while noting that both countries may provide a “better buying opportunity” later, Bloomberg reported.
Perhaps Indonesia’s anger will promptly blow off once the warning shot has been fired: at least as of this morning, JPMorgan’s business in Indonesia continues to operate as normal, the bank said in an e-mailed statement on Tuesday. “The impact on our clients is minimal and we continue to work with the Ministry of Finance to resolve the matter,” it said.
The government doesn’t see it quite as innocently, however: any tax payments by Indonesian companies which were previously routed through JPMorgan will now be passed to the government via other banks, according to Bank Indonesia Governor Agus Martowardojo.
The biggest U.S. bank was part of a underwriting syndicate when Indonesia sold 3 billion euros ($3.1 billion) of bonds in June. Hwoever, the lender wasn’t listed as a member of syndicates for two more recent offerings denominated in yen and U.S. dollars, according to Bloomberg data.
The government’s action illustrates some of the difficulties in producing balanced research reports, said Alan Richardson, an investment manager at Samsung Asset Management in Hong Kong. “I don’t think it will affect investor interest in Indonesia but it does reflect the difficulty of sell-side analysts to provide independent and objective opinions to their clients without upsetting the government officials and regulators,” Richardson said.
Meanwhile, JPM’s assessment appears to have been right: foreign investors sold a net $2.8 billion of Indonesian stocks and bonds last quarter as investors dumped emerging-market assets following Trump’s victory. That drove local markets and the rupiah lower, forcing policy makers to intervene to stabilize the currency.
For now Indonesia remains furious, and blames JPM for the recent market volatility: banks should take responsibility for economic reports that “could influence fundamentals and psychology,” Finance Minister Sri Mulyani Indrawati said Tuesday, when asked to comment on the termination of the JPMorgan relationship.
JPMorgan provides investment and commercial banking services to the public and private sectors in Indonesia, according to the bank’s website. It obtained an Indonesian banking license in 1968 in the name of Chase Manhattan, and opened a branch in Jakarta, followed by a representative office in 1978.
Curiously, in the aftermath of the last financial crisis, it was the rating agencies who got the bulk of the blame; that sellside equity research is now facing the proverbial “firing squad” when issuing negative research is rather troubling – this phenomenon is certainly not confined to the sovereign level – and indicates how banks, once caught with a Buy or Neutral rating on any given name, are loath to cut or downgrade, aware of the potential foregone future revenue opportunities as a result of telling the truth.
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