JAKARTA: Indonesia's stock market is no longer worthy of "emerging market" status, according to MSCI, which intends to remove it from a suite of products tracked by global investors, in a major setback likely to trigger capital outflows.
Indonesian equities are already the world's worst performers this year, struggling since January when MSCI froze Indonesia in its indices and threatened a downgrade to "frontier" status because of opacity in ownership and trading behaviour.
On Friday, it said reforms to address those problems had not made sufficient progress and that even a downgrade to frontier status would not reflect the severity of the issues.
Instead, it put Indonesia on a path to "standalone" status, which would exclude Indonesian stocks from global indices tracked by billions of dollars in passive investment, forcing funds that follow or are benchmarked against the indices to sell.
"Significant concerns remain around market dysfunction," MSCI said in a statement posted on its website. "Accordingly, MSCI considers Indonesia's continued classification as an emerging market no longer appropriate," it said.
"Feedback from market participants suggests that a reclassification to frontier markets would not properly recognise the depth of the market problems."
The Indonesia Stock Exchange said on Friday it had taken concrete steps to enhance transparency and integrity in the country's capital market.
The exchange respected MSCI's independence in conducting assessments and would seek further clarification on the basis for the announcement, its chief executive officer Jeffrey Hendrik said in a statement.
Indonesia's Financial Services Authority and Finance Minister Suahasil Nazara, who chairs the country's financial stability board, did not immediately reply to separate requests for comment on the MSCI announcement.
MSCI said it would consult market participants on a downgrade to "standalone" status until April 2027 and then proceed with the reclassification unless it found clear evidence of improvement in market governance and functioning.
Standalone markets are not included in MSCI's emerging or frontier index products, which are tracked by passive funds and serve as performance benchmarks for other fund managers.
MSCI said reclassification to standalone status could occur in cases of severe deterioration in market accessibility, size or liquidity, with Argentina being the most recent example.
Indonesia has faced a series of setbacks this year, with Moody's and Fitch cutting their sovereign rating outlooks to negative, citing reduced policymaking credibility.
The benchmark Jakarta stock index has fallen more than 30 per cent this year, making it the world's worst-performing equity market, with net selling by foreign investors amounting to US$4.7 billion worth of shares.
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