Indonesia’s JPMorgan rebuke hurts the country

Let’s think about the consequences of Indonesia’s decision to ban JPMorgan from its primary dealers list because a distant analyst downgraded his outlook on the country’s equity market.

First, let’s be clear on what prompted Indonesia’s reaction. It was not a report on Indonesian sovereign bonds. It was not even a report specifically on Indonesia. It was an emerging market equity report issued on the back of the Trump election win, downgrading Indonesian, Turkish and Brazilian equities (while upgrading Malaysia) because of volatility in emerging markets and telling investors: “We think you will get a better buying opportunity.”

If that is really all that is required to be kicked off a primary dealer list, then the message that other primary dealers will take – including Citi, HSBC, Standard Chartered and Deutsche – is that a similarly harmless macro equity call will be sufficient to get them removed too.

Those banks have been extremely cagey about what has happened in Indonesia, but we know all of them were summoned to a meeting with the finance ministry on January 9 and told what was expected of them. 

A summary of the new rules governing primary dealers appeared on the ministry’s website later that week, saying they “have the duty 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.”

The finance minister, Sri Mulyani Indrawati, can revoke the appointment of a primary dealer at any time if it does not fulfil these vague conditions.

One dealer says that, while finding the treatment of JPMorgan absurd, it will probably have to play by the rules. The Indonesian sovereign and its many sovereign-backed businesses are just too valuable to lose, not just in terms of being a primary dealer on government bonds but because it is seen as very unlikely that anyone kicked off the dealer list would get underwriting work either.

But what does playing by the rules mean? Does it mean that a regional equity strategist at Citi, or Deutsche, or HSBC, can never downgrade the outlook for Indonesian equities again? That is implausible and ridiculous. If it happens, that bank’s research would be discarded; if enough banks’ research on Indonesia is considered unusable, then investors will be less inclined to go near Indonesia at all.

The most baffling part of the whole situation is that it is Mulyani who has done this. Mulyani, awarded by this publication for her outstanding contribution to finance in her previous term as finance minister; Mulyani, a former World Bank managing director associated with reform. 

The ministry of finance declined an interview, so we can only assume Mulyani is making a point about banks that make money from volatility in the country’s debt and the inherent contradiction of a bank trying to sell a country’s securities while simultaneously telling investors to underweight the country. But none of this is unusual and one could argue that the fact that JPMorgan can downgrade Indonesian equities while selling the country’s debt demonstrates the bank’s Chinese walls are intact, not breached.

Now JPMorgan has reversed its call on Indonesia to neutral. And look what has happened: everyone is looking at the call with doubt, assuming that the bank is kowtowing to the Indonesian government. In fact, there was a reasonable premise both for the downgrade and the reversal; the Trump election made volatility spike in emerging markets and now that volatility has calmed down. But the fact that it looks like an appeasement helps no one. It does not help the bank and it does not help Indonesia either, because doubt has been sown in investors’ minds about the credibility of information about the country.

China is so dominant in Asia-Pacific issuance these days that any change in the country’s policy can have a dramatic impact on the fate of investment banks in the region. The big trend to watch this year already appears to be the balance between Chinese issuers raising debt onshore and offshore. 

Last year, as a rule, issuers opted for onshore capital raising where it was practical to do so and for good reasons: no currency mismatch, particularly as the renminbi came under pressure in the later part of the year; government encouragement; and the fact that it was considerably cheaper.

Yet 2017 has opened with a glut of dollar issuance from China, from quasi-sovereigns to high yield. 

Why? Apparently because there is a belief that the onshore issuance was creating pressure on the currency. 

So China has instead sought to calm domestic issuance, particularly from property developers, and made approvals easier to achieve overseas. That is good news for international banks, who now find that perhaps the biggest influence on their fee volume this year will be a single policy decision by the Chinese government.