JAKARTA • Indonesia's reform- minded finance minister seemed to invoke memories of the 1997- 1998 Asian financial crisis last week when explaining why she came down so hard on JPMorgan Chase for downgrading the country's equity market.
JPMorgan published a research report on Nov 13 that gave Indonesia an underweight assessment, just as South-east Asia's biggest economy was seeing a fund outflow, along with other emerging markets, after Mr Donald Trump won the US presidential election.
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 last week.
She 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.
Indonesian government bonds owned by foreigners at the end of last year.
Amount of Indonesian stocks and government bonds foreigners sold in November (32 trillion rupiah).
She also signed new rules on Dec 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".
Dr Sri Mulyani defended her crackdown on JPMorgan, saying that alongside fundamental economic factors, investors are influenced by psychology and perception, which is "sometimes very subjective".
Analyst Achmad Sukarsono of consultancy Eurasia Group called her 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 from its markets: Foreigners owned 37.55 per cent of its government bonds at the end of last year. In November, foreigners sold nearly 32 trillion rupiah (S$3.4 billion) of Indonesian stocks and government bonds, according to data from the Finance Ministry and the stock exchange, though the selling has since abated.
Before Indonesia's punishment, JPMorgan was a primary dealer. That meant it was allowed to buy government bonds in auctions and resell them in the secondary market. Indonesia had 19 such dealers including Citibank, Deutsche Bank and HSBC as of Nov 25.
Last Monday, JPMorgan upgraded its call on Indonesian stocks to "neutral", saying "bond volatility should now decay" after funds sold a large amount of bonds and equities in emerging markets.