JAKARTA: Indonesia’s stock market is no longer worthy of “emerging market” status, MSCI said yesterday, laying out a plan to remove it from a suite of indices tracked by funds, a shock move that sparked the steepest one-day drop in Jakarta shares since 1998.
The benchmark stock index, already the world’s worst performer this year, plunged 11% to a six-year low, while the rupiah slid 0.6% to 18,070 per US dollar, its weakest level since late July.
Indonesian equities have struggled since January when MSCI froze Indonesia in its indices and threatened a downgrade to “frontier” status because of opacity in ownership and trading behaviour.
Yesterday, MSCI said reforms to address those problems have not made sufficient progress and that even a downgrade to frontier wouldn’t reflect the severity of issues.
“Significant concerns remain around market dysfunction,” MSCI said. “Accordingly, MSCI considers Indonesia’s continued classification as an emerging market no longer appropriate,” it said in a statement.
Instead, it proposed a downgrade 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 ranked against the indices to sell.
UBS estimated such a move could trigger about US$4 billion (RM16 billion) of passive outflows from Indonesia, with active investors potentially adding a further US$15 billion in outflow. Already, foreign investors have net sold US$4.7 billion worth of Indonesian stocks in 2026.
Coming a month ahead of a scheduled review, MSCI’s change of tack stunned investors and irked Jakarta officials.
Indonesia’s senior economic minister Airlangga Hartarto said there was “a big question mark” over why MSCI did not discuss downgrading the country to “standalone” status during a meeting this week in Bangkok.
He made the comment ahead of a meeting of the country’s top officials, including the finance minister, the governor of the central bank and other related officials to discuss MSCI’s announcement.
The Indonesia Stock Exchange said it has taken concrete steps to enhance transparency and integrity in the country’s capital market, and CEO Jeffrey Hendrik said he would request further clarification on the basis for the announcement.
Angus Mackintosh, an Asean specialist at Aletheia Capital in Singapore, said the move did not reflect the health of the vast majority of listed companies or indeed the Indonesian economy, and “grouping Indonesia with Lebanon, Palestine, and Argentina does not make sense.”
“This is a wake-up call for Indonesia,” he said.
MSCI’s announcement piles pressure on the government under President Prabowo Subianto. 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 proposal highlights MSCI’s dissatisfaction with the pace of reforms and raises further questions about the investability of the market,” said Tan Altundag, investment manager for emerging equities at Pictet Asset Management.
“The investment implications could be significant,” said Altundag, who has no holdings in Indonesia.
The office of finance minister Suahasil Nazara, who chairs the country’s financial stability board, did not reply to a request for comment.
In a sign of investor anxiety over the index provider’s move, there was a rush for the exits when the market opened, triggering a 30-minute trading halt on the Jakarta exchange.
“It’s the first time this has ever happened in my 20 years in the stock market,” said Liza Camelia Suryanata, head of research at stockbroker Kiwoom Sekuritas Indonesia.
MSCI’s move seemed heavy-handed given the steps Indonesia has taken to address issues around market transparency and increase the free-float requirement for listed firms, Mackintosh said.
“The only way for Indonesia to remedy this situation would be to impose severe sanctions and fines on those involved in concerted share manipulation,” he said.
MSCI said it will run a consultation with market participants for a downgrade to “standalone” status until April 2027 and then proceed with reclassification unless it finds clear evidence of improvement in market governance and function.
Standalone markets are not included in MSCI’s emerging or frontier index products, which are tracked by passive funds and treated as performance benchmarks for other fund managers.
MSCI says reclassification to standalone status may occur in the case of severe deterioration in market accessibility or size and liquidity, with the most recent example being Argentina.
Indonesia, Southeast Asia’s biggest economy, would be the largest market to be downgraded to that classification. – Reuters