Indonesian stocks plunged more than 11 per cent on Friday (Oct 16) as index compiler MSCI said it was "no longer appropriate" to maintain the country's emerging-market status, fuelling fears of an exodus of foreign investment.
The US firm said earlier this year that investors had raised concerns about "ongoing opacity in shareholding structures" as well as coordinated trading behaviour that affected price information.
Authorities in Jakarta said in April they had completed reforms, hoping to avoid the downgrade, which could deal a blow to government efforts to kickstart Southeast Asia's biggest economy, and have a significant impact on investment decisions.
But on Friday MSCI said investors had indicated the "sufficient progress has not been observed consistently across the Indonesian equity market".
"Despite the announced reforms, significant concerns remain around market dysfunction, including continued suspected coordinated trading behaviour and lack of evidence of meaningful enforcement.
"Accordingly, MSCI considers Indonesia's continued classification as an Emerging Market no longer appropriate and is launching a consultation on a proposal to reclassify Indonesia as a Standalone Market."
"A reclassification to Frontier Markets would not properly recognise the depth of the market problems," it said.
A standalone classification could force investment funds tracking the MSCI's emerging market indexes to sell Indonesian holdings.
Argentina, Lebanon and Palestine are among the markets with the designation, with none in Asia, according to Bloomberg.
The Jakarta Composite Index collapsed 8 per cent at the open, sparking a trading halt. When trading resumed it was down 11.1 per cent, its heaviest fall since early 1998 and sitting at its lowest level since 2020.
New York-based MSCI produces international indexes used by investors as a benchmark to balance their portfolios.
It has a significant impact on investment decisions through its flagship emerging markets index, which contains 1,200 companies with a market capitalisation more than US$10 trillion.
Fund managers worldwide keep a close eye on what countries are included or excluded in MSCI's indexes as that can trigger adjustments to their portfolios.