Indonesia Minister Worried About Market Psychology

Indonesia’s reform-minded finance minister seemed to invoke memories of the 1997-98 Asian financial crisis this week when explaining why she came down so hard on JPMorgan Chase & Co for downgrading the country’s equity market. 

JPMorgan published a research report on November 13 that gave Indonesia an underweight assessment, just as Southeast Asia’s biggest economy was seeing an outflow of funds along with other emerging markets after Donald Trump’s victory in the US election, MENAFN reported. 

Finance Minister Sri Mulyani Indrawati, a former International Monetary Fund director and World Bank managing director, thought the downgrade could fuel a stampede out of the country’s assets. 

There may be a “herd mentality during a situation of panic in financial markets, so if someone shouts fire, everyone runs and then there’s a stampede”, she told a parliamentary committee this week. 

That is exactly what happened during the 1997-98 Asian Contagion financial crisis, when economies from Thailand to South Korea and Indonesia collapsed as foreign investors pulled capital from the region. 

Indonesia was the worst hit: a death spiral in the rupiah triggered a banking crisis, bankruptcies and rising unemployment and in a matter of months had toppled the country’s longtime autocratic president, Suharto. 

The US-educated Indrawati shocked the financial community by cutting all business ties with JPMorgan after the November research note, including its role as a primary dealer and underwriter for Indonesia’s sovereign bonds. 

She also signed new rules on December 30, requiring all primary bond dealers to adhere to “a principle that is aligned with the government and avoid conflicts of interest”. 

She said those conflicts arise when partners “receive business from the government, but on the other side they do something that is different from the government’s own interest”. 

Indrawati defended her crackdown on JPMorgan, saying that alongside fundamental economic factors, investors are influenced by psychology and perception, which is ‘sometimes very subjective. 

Achmad Sukarsono, an analyst at consultancy Eurasia Group, called Indrawati’s moves “a wake-up call for investors” that even the most reformist official in Indonesia is taking a political approach to policy and has no qualms about punishing negative opinion. 

Indonesia is particularly vulnerable to a foreign stampede out of its markets: foreigners owned 37.55% of its government bonds at the end of 2016. 

In November, foreigners sold nearly 32 trillion rupiah ($2.4 billion) of Indonesian stocks and government bonds, according to data from the finance ministry and the stock exchange, though the selling has since abated.