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(Adds details on other bank controversies in emerging markets)
By Nilufar Rizki, Eveline Danubrata and David Henry
JAKARTA/NEW YORK, Jan 3 (Reuters) - Indonesia has cut someties with JPMorgan Chase & Co after the bank's researchanalysts issued a negative report on the country, the latest ina series of skirmishes between Wall Street banks and governmentsin emerging markets.
Indonesia will no longer use JPMorgan as a primary bonddealer and has also revoked a special designation that allows itto perform certain banking services, Suahasil Nazara, head ofthe Ministry of Finance's fiscal policy office, told Reuters onTuesday.
It is the second time recently that JPMorgan's research armhas drawn ire from the Indonesian government, and highlights theinevitable conflicts banks face when their analysts express anegative view on a country or company that their investmentbankers are trying to court.
In other cases, banks have altered research reports, lostlucrative contracts or parted ways with analysts followingcontroversies about their negative opinions.
JPMorgan did the right thing by not backing down from itsreport, said Roy C. Smith, a finance and management professor atNew York University's business school. The bank stands to loserelatively little in Indonesia, where it does not have muchfinancial exposure.
"(It's) a mistake by Indonesia, which needs JPMorgan'ssupport and advice more than the bank needs Indonesia," Smithsaid. "No effort by governments unhappy with research calls to'discipline' the banks have been successful, though efforts aremade from time to time to satisfy local political expectations."
Global banks made changes to how they perform research in2003, after a sweeping settlement with then-New York AttorneyGeneral Eliot Spitzer and U.S. regulators. They erected hardbarriers between analysts and bankers and altered compensationstructures to prevent conflicts of interest from affectingresearch.
But the conflicts persist. Although pressure is usually lessexplicit than what JPMorgan faces in Indonesia, banks rangingfrom Morgan Stanley in China to Banco Santander in Brazil have faced similar rows with governments in emergingmarkets.
In JPMorgan's case, analysts led by Adrian Mowat downgradedtheir investment recommendation on Indonesia stocks to"underweight" from "overweight" in a Nov. 13 note, and alsodowngraded Brazil equities to "neutral."
They cited higher risk premiums for emerging markets afterDonald Trump won the U.S. presidential election, predicting thathigher volatility might stop or reverse flows into fixed-incomeassets.
The analysts characterized the recommendation as merely a"tactical" response to Trump's victory. They noted thateconomies in both Indonesia and Brazil are improving, with lowerpolicy rates likely to support valuations for 2017.
Nazara, of Indonesia's finance ministry, said JPMorgan'sanalysis "did not make sense" because it gave Brazil a betterrating than Indonesia, despite what he said was a more stablepolitical situation in the Southeast Asian nation.
"We have asked them to clarify their assessment," Nazarasaid. "They've explained to us, but we found their argument notcredible. It's not that we think we're so great, but we look atourselves and we look at other countries' economies."
"Our mindset is, if you're doing business here in Indonesia,the spirit is to maintain stability. Don't create unnecessaryvolatility to create business," he added.
After performing what Nazara described as a "comprehensivereview," Indonesia decided to drop JPMorgan as a primary dealerand a so-called perception bank. A 2006 government decree saysperception banks are appointed by the finance minister toreceive transfers of state revenue not related to imports,including tax, onshore excise and non-tax revenue.
A JPMorgan spokeswoman said on Tuesday that it continued tooperate its business in Indonesia as usual.
"The impact on our clients is minimal, and we continue towork with the Ministry of Finance to resolve the matter," shesaid by email.
JPMorgan strategists have had a "neutral" recommendation onemerging market government bonds, including those of Indonesia,since before the election, a JPMorgan spokesman said.
Robert Pakpahan, Indonesia's director general for budgetfinancing and risk management, told reporters on Tuesday thatJPMorgan's research should not have a major impact onIndonesia's future bond issuance, but the sanction on JPMorganwould remain in place "until we say otherwise."
In 2015, Indonesia's then-finance minister said thatJPMorgan had been "sanctioned" for a negative reportrecommending less exposure to government bonds, but did notexplain what the sanctions involved. [http://reut.rs/2iF58uK]
Banks have encountered a variety of problems managingconflicts in emerging markets.
In another high-profile skirmish in 2006, Morgan Stanley'shead economist in Asia, Andy Xie, left the bank after a criticalemail he sent about Singapore was leaked. In 2014, BancoSantander publicly fired an analyst who had published a criticalnote about Brazil's economic policies.
Goldman Sachs Group Inc lost a lucrative underwritingmandate for South Korea's Kookmin Bank in 2008 afterone of its analysts issued a sell recommendation on the shares.More recently, Goldman has been embroiled in a scandal regardingthe way it courted Malaysia's sovereign wealth fund, whileJPMorgan has faced probes into its hiring children of Chineseofficials to gain an edge in the country. (Reporting by Nilufar Rizki and Eveline Danubrata in Jakartaand David Henry in New York; Additional reporting by GayatriSuroyo, Hidayat Setiaji and Fransiska Nangoy in Jakarta andMichael Flaherty and Anna Irrera in New York; Writing by LaurenTara LaCapra; Editing by Will Waterman and Nick Zieminski)
