JPM JP Morgan Chase and Co

By I Made Sentana and Ben Otto in Jakarta, Indonesia and Rachel Rosenthal in Hong Kong 

JAKARTA, Indonesia -- Indonesia is planning stricter rules for market reports written by banks acting as primary dealers for government bonds, days after severing ties with J.P. Morgan Chase & Co. over what officials here said was a faulty equities downgrade.

Talk of such a move is highlighting the potential conflicts banks face in Southeast Asia's largest economy as they try to provide unbiased research to investors and banking services to clients they evaluate.

Finance Ministry officials told The Wall Street Journal on Saturday that they could begin discussing new policies on Monday for the 19 financial institutions that act as primary dealers in Indonesia's regular government domestic bond auctions. The ministry appoints banks and securities firms as primary dealers to buy government bonds in auctions and then resell them in the secondary market.

"Our goal is to ensure that banks don't release unnecessary reports that could destabilize the market, and that they differentiate between reports for internal circulation and those for public consumption," said Schneider Siahaan, director of debt portfolio and strategy for the ministry.

"Basically, it is about how to minimize the negative tone, how to minimize negative repercussions," he added.

Robert Pakpahan, director general of budget financing and risk management, said the ministry wasn't considering banning market research reports. He added that it was too early to speculate on the final nature of a change in policy, given that no formal meetings on the matter have taken place.

The discussions stem from a Nov. 13 report about the global repercussions of Donald Trump's election victory in the U.S., in which J.P. Morgan downgraded its rating on Indonesian equities to underweight from overweight, saying that a rise in bond-market volatility "increases emerging-market risk premiums." The largest U.S. bank by assets also made smaller downgrades to Brazilian and Turkish equities.

Indonesian finance officials said in recent days that the research lacked credibility and could destabilize the country's financial system. The government has cut its business partnerships with J.P. Morgan, including removing the bank from a list of primary dealers for government bond auctions.

An economist at a local primary dealer said J.P. Morgan had been the only primary dealer to issue such a downgrade during a volatile time for emerging markets after Mr. Trump's election.

In the banking world, securities analysts are supposed to provide independent, unvarnished investment advice to their commission-paying clients, but a negative word can alienate clients on the other side -- the stock and bond issuers that pay banks large fees to help them raise capital. That can cost bankers access to corporate executives or government officials, and lose them business from the offended issuers.

"It will make banks cautious" in Indonesia, said Kay Van-Petersen, global macro strategist at Saxo Bank in Singapore. "The research side is hard to justify. The big business is from the underwriting and getting the fees."

He said any move wouldn't necessarily affect investor interest in Indonesia, where a $900 billion economy for years has posted growth of around 5% or better. Emerging-market investors "are used to that kind of stuff," he said.

Major foreign primary dealers in Indonesia, including Citibank, Deutsche Bank, HSBC and Standard Chartered, declined to comment.

J.P. Morgan has said that it is working toward a resolution with the Finance Ministry. The bank said its business in Indonesia continues to operate as usual and that the effect on clients is minimal.

Still, being a primary dealer is an important part of business in a country like Indonesia where foreigners own a significant portion of domestic bonds -- almost 40%. That business can be worth tens of millions of dollars to banks annually and opens pathways to even more lucrative business with investors in secondary market trading.

J.P. Morgan is one of the largest foreign banks in Indonesia, and dealt with some of the largest flows from foreign investors into and out of government bonds. For that reason, officials here view the bank's research as especially pivotal to budgetary fundraising, financial analysts say.

A senior official of an Indonesian government financial institution said the government recognized that negative research reports are a fact of life, and that the Finance Ministry's policy response is likely to be measured. "Analysts can't recommend 'buy' or 'overweight' all the time," the official said.

Write to I Made Sentana at i-made.sentana@wsj.com, Ben Otto at ben.otto@wsj.com and Rachel Rosenthal at Rachel.Rosenthal@wsj.com

(END) Dow Jones Newswires

January 09, 2017 02:47 ET (07:47 GMT)

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