JPMorgan Penalised for Downgrading Indonesian Bond Rating

The decision was taken after JPMorgan downgraded its rating for Indonesian bonds to "underweight" from "overweight".

Finance Magnates learned today that Indonesia has penalised JPMorgan Chase after its research arm recommended a smaller exposure to the country’s sovereign bonds, as per a Reuters report.

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

Perception Bank

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.

According to Nazara, the penalty on JPMorgan has already taken effect. The decision was taken after JPMorgan issued a statement in November downgrading its rating for Indonesian bonds to “underweight” from “overweight”.

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In the statement, JPMorgan downgraded emerging markets including Indonesia and Brazil, citing higher risk premiums for their credit default swaps after Donald Trump won the US presidential election.

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

Nazara, however, commented that the bank’s analysis “did not make sense” because it recommended a “neutral” position for Brazil, a better rating than for Indonesia, despite “a more stable political situation in the Southeast Asian nation”.

Tactical Response

JP Morgan argued that the downgrade on Indonesia and Brazil was a “tactical” response to Trump’s victory. The bank is continuing to operate its business in Indonesia as usual and is working with the Ministry of Finance to resolve the matter.

Indonesia’s 10-year credit default swap IDGV10YUSAC=MG, a swap contract used to measure credit risk in fixed-income products, and the yield of its benchmark 10-year bonds ID10YT=RR, spiked after the US election, although they have since dipped.

Analysts have commented that Indonesia’s economy should be supported by domestic consumption, which makes up more than half of gross domestic product, but the relatively high foreign ownership of government bonds and the lack of depth in Indonesia’s financial markets make it vulnerable to capital reversals.

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