Foreign Perceptions of Indonesian Economy, Gov't vs JPMorgan

JP Morgan released the report (that includes Indonesia's double downgrade) in November 2016, the month in which global markets were rocked by the surprise victory of Donald Trump in the 2016 US presidential election, another looming Fed Funds Rate hike, while ethnic and religious tensions were rising in Indonesia with a huge demonstration being staged in Jakarta - in early November - by conservative Muslims who demanded the arrest of Jakarta Governor Ahok. In that month (November 2016) the Indonesian rupiah depreciated around 4.5 percent against the US dollar.

Indeed, in November 2016, there was plenty of reason to be concerned about Indonesia's short-term conditions (and therefore foreign investors sold a net USD $2.8 billion of Indonesian stocks and bonds in the fourth quarter of 2016). Not only Indonesia, also other emerging markets were plagued by capital outflows due to (looming) monetary tightening in the USA and expectations of a rebound in US corporate earnings, accelerated US economic growth, and prospects of tax cuts and fiscal stimulus under the new Donald Trump administration.

However, we regard JP Morgan's double downgrade of Indonesia as "excessive" (a single downgrade would make more sense, as in the case of Brazil). Likewise, we label the reaction of Indonesian government officials as "excessive" as well.

Indonesian Finance Minister Sri Mulyani Indrawati was not amused when learning about the double downgrade. According to her, Indonesia's economic fundamentals are currently strong, reflected by accelerating GDP growth, low inflation, an improving current account deficit, a stable rupiah exchange rate (supported by the government's tax amnesty program), and a manageable budget deficit (2.46 percent of GDP). Sri Mulyani said it is irresponsible of JP Morgan to double downgrade Indonesia and therefore she insisted to cut all ties with JP Morgan. However, the reaction of the Indonesian government also gives rise to concern whether other research providers may face difficulties when releasing reports about the Indonesian economy that are deemed to be negative.

The termination of cooperation between the Indonesian government and JP Morgan implies that the "perception bank" status of JP Morgan in Indonesia has been revoked and therefore it cannot provide any services within the largest economy of Southeast Asia anymore, including the underwriting of bonds (JP Morgan is a traditional underwriter for Indonesian government global bonds).

JP Morgan told news agency Bloomberg on Tuesday (03/01) that their operations in Indonesia continue to run as usual and they will discuss matters with Indonesia's Finance Ministry to come to a solution.

It is interesting to take a look at the perceptions - of a selection of influential foreign institutions - on the Indonesian economy.

Institution	Perception
Fitch Ratings	Recently Fitch affirmed Indonesia's long-term foreign- and local-currency issuer default ratings at 'BBB-' but revised the outlook from 'stable' to 'positive'. The improvement is primarily attributed to Indonesia's low government debt burden, favorable economic growth outlook, and the government's structural reform agenda.
BNP Paribas SA	Says the growth spurt in the USA will aid Asian equities although higher inflation and sharper-than-anticipated rate hikes in the USA also imply sustained US dollar strength, which will hit sentiment. Risk premium in emerging markets is expected to remain high. It sees stable economic growth in Indonesia and recommends buying Indonesia’s rupiah because of the country's higher yields and support from the commodity-producing economy.
HSBC Global Asset Management	Rupiah-denominated sovereign bonds are their favorite as they offer good value after the recent selloff. While there remain plenty of global uncertainties, Indonesia is better positioned than its regional peers in Asia.
Western Asset Management	Believes that Indonesian and Indian (local currency) bonds are good choices.
Morgan Stanley	Included Indonesia in its sovereign credit trade recommendation for 2017.
Credit Suisse Group AG	Positive on Indonesia due to the improving macroeconomic environment, balance sheets, valuations and underexposure of global funds.
IG Asia	Favors Indonesian equities because amid subdued growth and an uncertain trade situation, economies with strong domestic fundamentals appear to be most promising.
Pioneer Investment Management	Keeps overweight positions in India and Indonesian notes due to the two nations' reform processes, improving economic growth and relatively high yields.
Goldman Sachs	Believes Indonesia's economic fundamentals are strong enough to limit heavy pressure on its currency and capital outflows amid monetary tightening in the USA.
Indonesia Investments	Despite possible short-term capital outflows in times of monetary tightening in the USA (or other global shocks), Indonesia's economic fundamentals are improving gradually, yet continuously, due to structural reforms and prudent fiscal management of local authorities. The government's focus on the development of the manufacturing industry and infrastructure will significantly strengthen the country's economy on the long-term.

^{Various sources}

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