Indonesian shares rattled as Goldman cuts rating after MSCI halts index moves
Goldman Sachs downgraded Indonesian equities after MSCI froze index changes over investability concerns, warning a potential EM-to-frontier cut could spark heavy outflows.
Bloomberg reported that Goldman Sachs Group Inc. has downgraded Indonesian equities to “underweight”, warning that MSCI Inc.’s concerns about Indonesia’s stock market could trigger more than US$13 billion of outflows if Indonesia were to be reclassified to frontier market status.
Markets are now focusing on the worst-case scenario: if Indonesia is downgraded from “emerging market” status, passive funds that track MSCI indices could be forced to sell as much as US$7.8 billion of Indonesian equities.
In addition, a further US$5.6 billion of outflows could be triggered if another index provider, FTSE Russell, were to reassess its methodology and Indonesia’s market status as well.
Timothy Moe and his team wrote in a research note that they expect sustained selling pressure to emerge—though not necessarily panic selling immediately—and warned that the situation could become a significant negative overhang, weighing on Indonesia’s market performance over the longer term.
They added that many active fund managers in the region currently hold relatively high allocations to Indonesian equities. As a result, the risk of a downgrade, heightened volatility and weaker liquidity could accelerate portfolio de-risking by longer-term investors.
What’s happening in Indonesia’s stock market?
On 28 January, Indonesia’s benchmark index dropped 7.4% after MSCI announced it would temporarily freeze certain index treatments and adjustments, while awaiting regulatory action to address concerns related to market structure and transparency—particularly around ownership and free float.
MSCI described the issue as a “fundamental investability” concern, highlighting worries that the effective free float may be lower than reported. It said it is considering whether alternative data sources should be used to determine how many shares are genuinely available for public trading. If the true tradable amount proves lower than what is disclosed, global funds that track MSCI indices could be forced to adjust—potentially resulting in selling pressure on Indonesian stocks.
Reuters reported that Indonesian authorities said they would evaluate MSCI’s requests and hold discussions with financial market institutions after the market tumble.
A long-running structural concern in Indonesia’s roughly US$976 billion stock market is that shares in many large companies are often controlled by a small number of wealthy owners, limiting liquidity and amplifying volatility—conditions that investors say can distort index performance and raise manipulation risk.
Regulators have been working on possible remedies, including proposals to raise minimum free float requirements, though investors are watching closely to see whether measures are implemented and whether MSCI is satisfied.
