Indonesia stocks slide as MSCI plans standalone market downgrade

MSCI plans to downgrade Indonesia from emerging-market to standalone status, a move that would remove the country’s shares from major global indexes and potentially trigger further foreign fund outflows.

The index provider said reforms undertaken by Indonesian authorities had not made sufficient progress in addressing concerns over market transparency, ownership structures and trading behaviour.

MSCI said Indonesia’s continued classification as an emerging market was no longer appropriate because significant concerns remained over the functioning of the market. It added that a downgrade merely to frontier-market status would not adequately reflect the scale of the problems.

Jakarta stocks sink to six-year low

Indonesia’s benchmark stock index plunged as much as 10% to a six-year low in early trading following the announcement.

The rupiah also weakened 0.6% to 18,000 against the US dollar, its lowest level since August.

Indonesian stocks had already been under heavy pressure since January, when MSCI froze changes to the country’s representation in its indexes and warned that it could be downgraded to frontier-market status.

The Jakarta market has fallen by more than 30% this year, making it the world’s worst-performing equity market, while foreign investors have sold a net US$4.7 billion of Indonesian shares.

Standalone status would remove Indonesia from global indexes

Standalone markets are not included in MSCI’s emerging- or frontier-market index products.

A downgrade would therefore exclude Indonesian shares from indexes followed by billions of dollars in passive funds and used as benchmarks by active investment managers.

That could force index-linked funds to sell Indonesian stocks and increase pressure on the rupiah through further foreign capital outflows.

MSCI said standalone status can be used when a market suffers a severe deterioration in accessibility, size or liquidity.

The most recent example of such a reclassification was Argentina.

MSCI consultation runs until April 2027

MSCI will consult market participants on the proposed downgrade until April 2027.

It intends to proceed with the reclassification unless Indonesia can demonstrate clear improvements in market governance and functioning.

A final decision is expected by June 2027.

The tougher proposal came a month before a previously scheduled review and surprised Indonesian officials and investors.

Indonesia vows to improve transparency

The Indonesia Stock Exchange said it had already taken concrete steps to strengthen transparency and integrity in the capital market.

Chief Executive Officer Jeffrey Hendrik said the exchange would seek further clarification from MSCI over the basis of the announcement.

Friderica Widyasari Dewi, head of Indonesia’s financial regulator, also said she had not expected the announcement following discussions with MSCI earlier in the week.

Indonesia has taken measures to address concerns including market transparency and the minimum free float required for listed companies.

However, market analysts said enforcement remained a key issue, particularly around suspected share-price manipulation.

Investors warn of currency pressure

Gary Tan, portfolio manager at Allspring Global Investments in Singapore, described the proposed standalone classification as a surprise.

He said the greater concern for Indonesia could be the pressure on the rupiah caused by foreign capital leaving the market rather than simply the direct impact on share prices.

Angus Mackintosh, an ASEAN specialist at Aletheia Capital in Singapore, argued that the classification did not reflect the overall health of most listed Indonesian companies or the wider economy.

However, he described the MSCI announcement as a wake-up call for Indonesia to address weaknesses in its capital-market governance.

The MSCI warning adds to broader pressure on Indonesia this year after Moody’s and Fitch both lowered the outlook on the country’s sovereign credit rating to negative, citing concerns over policymaking credibility.

Source: Reuters