Indonesian stocks fell by the most since January after MSCI Inc. said the country no longer merits emerging-market status, risking an ejection from its global indexes and triggering fears of foreign capital flight.
The index provider is consulting on a proposal to give Indonesia standalone status, saying a downgrade to frontier would not adequately reflect the severity of the country’s market problems. MSCI expects to proceed with the change unless it finds clear evidence of material improvements in market governance and functioning.
Despite reforms announced by Indonesian authorities, “significant concerns remain around market dysfunction, including continued suspected coordinated trading behaviour and lack of evidence of meaningful enforcement,” MSCI said in a statement Thursday.
The Jakarta Composite Index dropped 8% at the open on Friday to trigger a 30-minute trading halt, deepening a year-to-date decline that already makes it the worst-performing market among global peers. The rupiah weakened 0.5% to 18,035 per dollar, while the yield on 10-year sovereign bonds was little changed.
MSCI’s proposed reclassification applies fresh pressure on a market already battered by investability concerns and policy uncertainty under President Prabowo Subianto. Coming months after MSCI’s January warning sparked a historic stock rout, the latest proposal marks a major blow to Prabowo’s ambitions of drawing foreign capital to Southeast Asia’s largest economy.
In a statement, the Indonesia Stock Exchange said it plans to seek clarification from MSCI on the rationale and assessment criteria behind the reclassification plan, adding the country has implemented “significant progress and reform measures.”
Standalone status is reserved for markets that don’t meet MSCI’s criteria for inclusion in either its emerging- or frontier-market indexes. Argentina, Lebanon and Palestine are among the markets with the designation, with none in Asia.
A standalone classification could force passive funds tracking MSCI’s emerging-market indexes to sell Indonesian holdings, while active managers benchmarked against those indexes may also cut exposure. Losing access to both emerging- and frontier-market benchmarks could further weaken foreign investor demand, putting additional pressure on share prices and liquidity.
“We want to make sure our market is very competitive and market friendly, and any feedback from market participants is always noted,” said Pandu Sjahrir, chief investment officer of Danantara.
The latest MSCI move “simply continues the downward trend for Indonesia in terms of investibility,” said Win Thin, chief economist Bank of Nassau 1982, who sees a risk of further capital outflows from the stock market.
Foreign funds have pulled a net $4.9 billion from Indonesian stocks so far this year, according to data compiled by Bloomberg. The main stock benchmark has fallen 38% so far this year.
The outflows have weighed on the rupiah, which has fallen about 8% this year, making it Asia’s worst-performing currency.
‘Deeper Correction’
“We anticipate that foreign selling pressure and market volatility will persist until there is clarity concerning Indonesia’s standing,” Liza Camelia Suryanata, head of research at PT Kiwoom Sekuritas Indonesia, wrote in a note. “The JCI could undergo a deeper correction.”
The MSCI consultation will run through April 30, 2027, with a final decision expected by June 30, MSCI said.
Indonesian authorities have announced a series of reforms aimed at averting a downgrade, including enhanced disclosure of shareholders with ownership above 1%, more detailed investor classifications and a roadmap toward a minimum free-float requirement of 15%. Authorities are also working on a plan to demutualize the exchange after appointing a new chief executive officer in June.
But MSCI has said investors need to see consistent implementation and evidence that the measures are materially improving market functioning. MSCI in June postponed its review on the nation’s equities, saying it needs more time to see whether recently announced transparency measures are effective.
In the Thursday announcement, MSCI said it will also maintain its freeze on certain index changes involving Indonesian securities until further notice.
Meanwhile, FTSE Russell earlier this month reaffirmed the emerging-market status of Indonesian equities amid efforts taken by local authorities.
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