Indonesia's Jakarta Composite Index fell 3.6% on the 19th, extending losses for a second straight session after a 12% plunge in the previous trading day and marking the worst rout in about 30 years. The slide came after index provider MSCI said it was considering downgrading Indonesia from emerging market to standalone status.
Foreign selling has spread from stocks to bonds and the currency, according to Bloomberg and other outlets. Overseas investors have sold a net $5.1 billion (about 6.8 trillion won) of Indonesian stocks this year, the largest annual outflow on record and the worst performance among global stock markets this year.
MSCI said on the 16th that it was reviewing a downgrade of Indonesia from emerging market to standalone status, two steps below the frontier market reclassification it had flagged in January. MSCI cited investor concerns about opaque ownership structures and suspected collusive trading, concluding that measures announced by authorities this year had not made sufficient progress. A final decision is due by June next year.
The 10-year government bond yield rose 7 basis points (1 basis point = 0.01 percentage point) to a four-month high, climbing as much as 12 basis points intraday to 7.47%. The rupiah weakened 0.2% to hover around 18,000 per dollar (about 1,330 won). U.S. Treasury yields above 5% are also eroding the appeal of Indonesian assets.
"Foreign capital is pulling out of the Indonesian stock market entirely, and now the bond market is shaking," said Eugenia Victorino, head of Asia strategy at SEB. "The rupiah's slide is eating into real yields." She added that global funds will choose to watch from a safe distance until the currency finds its footing.
Forecasts for further outflows vary by institution. Goldman Sachs estimated that about $5.6 billion (about 7.4 trillion won) in passive funds could leave if Indonesian stocks are removed from the index entirely, with another $2.7 billion (about 3.6 trillion won) at risk should FTSE Russell follow suit. Mirae Asset Sekuritas Indonesia put the figure at about $3 billion (about 4 trillion won), while Citigroup estimated it in the mid-single-digit billions of dollars (about 1.3 trillion won).
The Indonesia Stock Exchange narrowed the daily decline limit for individual stocks to 7% from 15% through the end of the year. The Financial Services Authority (OJK) said on the 16th that it had found evidence of manipulation in the trading of three companies' shares and in initial public offering (IPO) allocations. Indonesian officials said they were caught off guard by MSCI's warning and planned to meet with MSCI executives for an explanation.
Three companies linked to billionaire Prajogo Pangestu all planned share buybacks totaling 2.5 trillion rupiah ($138 million, about 180 billion won). Dian Swastatika Sentosa, part of the Sinar Mas Group, also proposed a 1 trillion rupiah buyback. Last week, authorities announced fines of about $117 million (about 160 billion won) over market manipulation involving some companies.
DBS said that if the correction spreads, the 10-year yield could climb to 7.5% and Bank Indonesia (BI) could deliver an additional 50 to 100 basis points of rate increases. "Right now even local investors aren't buying," said Hui Ling Low, managing director at ACG Management. "The uncertainty is too great."