Indonesia Penalizes JPMorgan

Indonesia will drop JPMorgan Chase & Co from providing some services to the government after the bank’s research arm said investors should reduce their exposure to the country, senior finance ministry officials said on Tuesday.

“After we did a comprehensive review, we said no need to use JPMorgan’s services as a primary (bond) dealer and a perception bank,” Suahasil Nazara, the head of the ministry’s fiscal policy office, told Reuters.

A 2006 government decree says a perception bank is one appointed by the finance minister to receive transfers of state revenue not related to imports, including tax, onshore excise and non-tax revenue.

Nazara said the penalty on JPMorgan was already in effect.

In an equities research note dated Nov. 13, JPMorgan downgraded its investment recommendation on Indonesia to “underweight” from “overweight”, citing higher risk premiums for emerging markets after Donald Trump won the US presidential election.

“Bond markets are starting to price in faster growth and higher deficit,” the bank wrote, adding that the “spike in volatility” may stop or reverse flows into fixed-income assets in emerging markets.

However, the bank said in the note that the downgrade on Indonesia and Brazil was a “tactical” response to Trump’s victory. Both economies are improving, with lower policy rates likely to support valuations for 2017, it added.

A JPMorgan spokeswoman said on Tuesday that it continued to operate its business in Indonesia as usual. “The impact on our clients is minimal, and we continue to work with the Ministry of Finance to resolve the matter,” she said by email.

Nazara said the bank’s analysis “did not make sense” because it recommended a “neutral” position for Brazil, which is better than for Indonesia, despite what he said was a more stable political situation in the Southeast Asian nation.

“We have asked them to clarify their assessment. They’ve explained to us, but we found their argument not credible. It’s not that we think we’re so great, but we look at ourselves and we look at other countries’ economies,” Nazara said.

Primary dealers of Indonesian government bonds as of Nov. 25 included Citibank, Deutsche Bank AG, Hongkong and Shanghai Banking Corporation Limited and local lender PT Bank Central Asia Tbk, according to the finance ministry’s website.

Indonesia’s 10-year credit default swap, a contract used to measure credit risk in fixed-income products, and the yield on its benchmark 10-year bonds spiked after the US election, though they have since dipped.

Fitch Ratings revised in December Indonesia’s credit rating outlook to positive, citing a relatively low government debt burden, favorable growth outlook and an improving business environment.