Pacific Money | Economy | Southeast Asia

Indonesian Stock Exchange Plunges After Fresh MSCI Downgrade Threat

Citing the lack of action on promised reforms, the global index provider has proposed demoting the country from “emerging market” to “standalone market” status.

The corporate headquarters of the Indonesia Stock Exchange in Jakarta, Indonesia, Jan. 23, 2025.

Indonesia’s stock market fell more than 11 percent on Friday, the steepest one-day drop since 1998, after the global index provider MSCI proposed the country’s removal ‌from its global stock indexes.

In a statement on Friday, MSCI said that it had launched “a consultation on a proposal to reclassify the MSCI Indonesia Indexes from Emerging Market to Standalone Market status.”

The proposal is more serious than MSCI’s earlier threat, announced in January to downgrade Indonesia from “emerging market” to “frontier market” status due to a number of transparency concerns in its stock market. Chief among these were the high concentration of ownership in certain companies and the limited “free float” of shares – i.e., those openly available for public trading.

On Friday, MSCI again cited “significant concerns regarding the investability of the Indonesian equity market, including persistent opacity in shareholding structures and suspected coordinated trading behavior.”

MSCI said it would procure feedback from market participants until the end of April 2027, and then announce its decision by June 30.

MSCI’s role as the primary benchmark for institutional investors gives it considerable power over emerging economies. As Reuters explains, a downgrade to “standalone” status “would exclude Indonesian stocks from indexes tracked by global funds, potentially triggering billions of dollars in capital outflows.”

Markets responded to the news as one would expect, with the Jakarta Composite Index falling by 11.6 percent, losing $65 of value. It was the largest single-day drop since the Asian financial crisis.

After MSCI’s January announcement, which also caused a hemorrhage in Indonesian equity markets, Indonesia announced a long list of reforms to address MSCI’s concerns, including a doubling of the ​minimum free float for listed companies to 15 percent. Top executives of the exchange and regulatory body also ​stepped down.

However, in its statement on Friday, MSCI said that “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 behavior and lack of evidence of meaningful enforcement,” it stated. “Feedback from market participants suggests that a reclassification to Frontier Markets would not properly recognize the depth of the market problems.”

MSCI said that it “expects to proceed with the proposed reclassification” barring clear evidence of “material improvements in market governance and functioning.”

If downgraded, Indonesia would join Argentina, Lebanon, Palestine, Ukraine, and Zimbabwe in the standalone category, becoming both the largest economy and the only Asia-Pacific market in the grouping. MSCI has said that reclassification to “standalone” status is typically done in cases of “severe deterioration in market accessibility or size and liquidity.”

The announcement, which came ahead of MSCI’s expected verdict on Indonesia’s reclassification to “frontier” status next month, came as a shock to many observers. Rully Arya Wisnubroto, head of research at........

© The Diplomat